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March, 2012 Adoption Credit Phone Forum Questions and Answers

If an adoptive parent pays qualified adoption expenses in 2011 and the adoption is finalized in 2012, are those expenses first allowable on the 2011 income tax return or on the 2012 return?  

Answer:  The expenses are first allowable on the 2012 income tax return (which will be filed in 2013).  

For a domestic adoption, if qualifying adoption expenses are paid any year before the adoption becomes final, the proper year for claiming the credit is the year following the year of payment.  If the qualifying adoption expenses are paid during or after the year the adoption becomes final, the credit is claimed for the year of payment.

For a foreign adoption, the credit for qualifying adoption expenses generally is claimed for the year in which the adoption becomes final.  Thus, expenses paid prior to the year of finality are treated as if they were paid in the year of finality.  Expenses paid during or after the year the adoption becomes final are allowable in the year of payment.

Example:  An adoptive parent pays qualifying adoption expenses of $3,000 in 2009, $4,000 in 2010, and $5,000 in 2011.  In 2011, the adoption is finalized.  In 2012, in connection with the same adoption, the adoptive parent pays an additional $500 of qualifying adoption expenses.

If the adoption was domestic, the adoptive parent claims the $3,000 of expenses paid in 2009 on his or her 2010 tax return (which is filed in 2011).  Both the $4,000 paid in 2010 and the $5,000 paid in 2011 are claimed on the 2011 tax return (which is filed in 2012).  The $4,000 is claimed on the 2011 return because 2011 is the year after the year in which the $4,000 was paid.  The $5,000 is claimed on the 2011 return because 2011 is both the year of finality and the year of payment. The $500 paid in 2012 is claimed on the 2012 return because 2012 is the year of payment.

If the adoption was foreign, $12,000 of the expenses paid ($3,000 + $4,000 +$5,000) are claimed on the 2011 tax return (which will be filed in 2012).  The $7,000 of expenses paid before 2011 are treated as paid in 2011 (the year of finality).  The $5,000 of expenses paid in 2011 are claimed in 2011 because 2011 is both the year of finality and the year of payment.  The $500 paid in 2012 is claimed on the 2012 return because 2012 is the year of payment.

Can I claim the adoption credit expenses paid for an unsuccessful adoption?    

Answer:  You can claim the adoption credit for qualified adoption expenses paid for the attempted adoption of an eligible child who was a U.S. citizen or resident at the time the adoption effort began.  The credit is claimed for the year following the year of payment.  

Is it necessary to go through a re-adoption in the U.S. for an adoption that was finalized in a foreign country?

Answer: Re-adoption is the legal process of adopting a child in the United States after a child has already been legally adopted in a foreign country.  Recognition of foreign adoptions is governed by state law rather than by federal law and varies among the states.  Therefore, whether re-adoption is necessary in a particular state depends on what that state’s law requires.

If I was audited and denied an adoption credit in a prior year, can I re-apply for the adoption credit for the expenses previously denied on my 2012 tax return?

Answer: Generally, no.  However, you may request reconsideration of a prior-year denial if you have new information that could change the earlier decision.  To request reconsideration, send the IRS copies of the earlier audit letter and of the new documents.  You may not request audit reconsideration, however, if you previously signed an agreement agreeing to the amount of tax you owed as a result of the audit.  

Occasionally the adoption credit was denied for a prior year because the credit was claimed prematurely.  If your prior-year adoption credit was denied because you were claiming expenses from an in-process foreign adoption or an in-process special needs adoption, you may claim the credit on the applicable subsequent-year return once the adoption becomes final.

Can military personnel claim the adoption credit for expenses reimbursed by the military?

Answer:  No.  Expenses paid or reimbursed by the military, or any other employer, or any other person or organization, are not qualified adoption expenses.  The only exception involves the adoption of a child that the state has determined has special needs.  In that circumstance, you are treated as having paid qualified adoption expenses even if the state reimburses you for those expenses.   

Example: You paid $12,000 in qualifying expenses and the military reimbursed $2,000 of those expenses. The $2,000 reimbursed by your employer is excludible from your gross income.  Your maximum adoption credit is limited to $10,000 ($12,000 total expenses, less $2,000 employer reimbursement).  

Can qualified adoption expenses for multiple failed attempts be claimed in the same year as a completed final adoption?

Answer: Yes, assuming the timing requirements are met.  For example, if you paid qualified adoption expenses in 2010 both for a failed domestic adoption and for a successful domestic adoption that finalized in 2011, you can claim the expenses for both the failed and the successful adoptions for the 2011 year (subject to the dollar limitation).  To claim the expenses, complete both Part I and Part II of Form 8839.  Refer to the Form 8839 Instructions for additional information.

If my return is being audited, will the IRS send a portion of the refund to me before the audit is completed?

Answer: Yes, if you are entitled to a refund other than the adoption credit, the non-adoption credit portion will be refunded to you before the audit of the adoption credit is completed.

For tax year 2010, if my qualified adoption expenses were more than $13,170, can I claim the expenses in excess of $13,170 in future years?

Answer: No. The maximum dollar limit for tax year 2010 is $13,170 per child.  If the amount of your qualified adoption expenses allowable in 2010 was more than $13,170, you have exceeded the maximum dollar limitation and will not be allowed to claim the extra expenses in any future year.  

How long can I carry forward the adoption credit on a tax return?

Answer: You can only carry forward the adoption credit for 5 years. For example, a credit for a 2004 adoption cannot be carried forward beyond the 2009 tax year.

If I finalized the adoption in 2009, but I did not claim the credit, can I take the credit on my 2012 tax return or should I file amended returns claiming the credit for all prior years?  

Answer: If the adoption was final in 2009 and you were eligible for the credit in that year, you should file an amended return to claim the adoption credit for 2009.  Any qualified expenses in excess of your 2009 tax liability should be claimed on your 2010 tax return.  Because the credit was refundable for 2010, you will receive a refund for any portion of the credit that exceeds your 2010 tax liability.  You should not amend your 2011 tax return.   

What are the maximum adoption credit amounts and income limitations for 2011, 2012 and 2013?  

Answer: For tax year 2011, the credit is refundable for all adoptions:
The maximum credit and the exclusion for employer-provided benefits are $13,360 per eligible child.

The income phase out begins if you have modified adjusted gross income (MAGI) in excess of $185,210 and is completely phased out for MAGI of $225,210.  

For tax year 2012, the credit is nonrefundable for all adoptions:  
The maximum credit and the exclusion for employer-provided benefits are  $12,650 per eligible child.  

The income phase out begins if you have modified adjusted gross income (MAGI) in excess of $189,710 and is completely phased out for MAGI of $229,710.

For tax year 2013, the credit is nonrefundable and for special needs adoptions only:

The maximum credit is $6,000 per eligible child, and is only for special needs adoptions.  The exclusion for employer-provided benefits is not allowed.  The income phase out amounts for 2013 have not yet been determined.

 

SPECIAL NEEDS

 

If I adopted a special needs child from a foreign country, what boxes on the Form 8839 do I check?

Answer:  Form 8839, Qualified Adoption Expenses, Part I, states that box (d) should be checked if the child adopted has special needs and that box (e) should be checked if the child is a foreign child.  If you adopted a foreign child, check ONLY box (e); do NOT check box (d).  

For federal income tax purposes, a child can be defined as a special needs child only if the child was a citizen or resident of the U.S. or one of its possessions at the time the adoption effort began.  A foreign child does not meet the tax definition of a child with special needs.  

Additionally, many U.S. children who have disabilities are not considered special needs for the purposes of the adoption credit.  Generally, special needs adoptions are the adoptions of children whom the State child welfare agency considers difficult to place for adoption.  Most foster care adoptions are special needs adoptions, but few other adoptions are special needs adoptions.

What type of subsidy agreements should be sent to the IRS when claiming adoption credit for special needs?   

Answer: Adoption subsidy agreements are not uniform throughout the United States.  Rather, those agreements vary by state (or by counties, which may be acting on behalf of the states).  You should send a copy of the type of subsidy agreement which is used by your state.

If a family had a special needs domestic child placed in their home in 2010, but the adoption was not final until 2012, can the family receive the maximum refundable adoption credit of $13,170 in 2010 even though they paid no actual out of pocket adoption expenses in 2010?   

Answer:  No.  As a general rule, the adoption credit cannot be claimed for a special needs adoption until the adoption becomes final.  Rather, in the year the adoption becomes final, the adoptive parents are treated as having paid an amount of qualified adoption expenses equal to the maximum dollar limit in the year of finality.

Because the adoption became final in 2012, the adoptive parents can claim a maximum adoption credit of $12,650 on their 2012 tax return (which will be filed in 2013).  The credit for 2012 is nonrefundable.  

Occasionally the adoptive parents of a child with special needs pay qualified adoption expenses before the adoption becomes final.  In that circumstance, the adoptive parents can claim a credit, under the usual timing rules, for the qualified adoption expenses actually paid.  Any amounts claimed before the adoption becomes final must be subtracted from the amount claimed for the year of finality.

Example:  A special needs domestic child was placed with a family in 2010, with the adoption being finalized in 2012.  In 2010, the adoptive parents paid $650 in qualified adoption expenses in connection with that child.  The adoptive parents can claim an adoption credit of $650 for the 2011 tax year (the year after the year of payment).  In 2012, when the adoption is finalized, the adoptive parents can claim a maximum credit of $12,000 ($12,650 maximum dollar limit, less $650 claimed for the 2011 year).    

Will the IRS accept documentation from the county child welfare agencies as proof of that an adopted child was a child with special needs, if the county welfare agencies are acting on behalf of the state?

Answer: Yes.  Some states delegate adoption casework responsibilities to county child welfare agencies.  Documentation from county child welfare agencies are reviewed and accepted on a case-by-case basis. Generally, the county documentation must be dated and should indicate special need status and/or that the county has approved adoption assistance/subsidy for the child.  

What documents are required by the IRS to show that a child is special needs?  

Answer: When claiming the adoption credit for a domestic adoption of a special needs child, you must show both that the adoption is final and that the child has been determined by the state to have special needs.  Therefore, you must provide –

  • A copy of a decree, judgment, or other court order which shows that the adoption is final, which lists the names of the adoptive child and parent, and which is signed and dated by a representative of the state court, and;
  • A state or county determination that the child has special needs.

Some states include information about the state or county determination of special needs as part of the adoption decree, judgment, or order.  If all the required information is found in the decree, you can attach only the decree to your return.  But if the information is found in different documents, you must provide both the decree and one other document that shows the state or county determination of special needs.

If you have adopted more than one child who the state has determined has special needs, you must provide a copy of the adoption decree and of the state determination of special needs for each child.  Many states provide a decree and the state determination of special needs on a per-child basis.  Accordingly, if you adopted two children, you may have to attach up to four pieces of documentation to your return (two adoption decrees and two state determinations).  

However, if the state combines the information, you may provide the information in its combined form.  For example, if the state issues a combined degree of adoption for both children and a different document that shows both children have been determined to have special needs, you may attach two documents to your return (the combined adoption decree and the combined determination of special needs).  If all the required information for both children is contained in a single, combined adoption decree and state determination of special needs, then you need attach only the one document.

For a more detailed breakdown of adoption credit documentation requirements review the Adoption Credit Documentation Requirements chart.

If a private adoption agency fails to apply for a special needs subsidy from the state, how can an adoptive parent prove/document special needs?

Answer: Special needs for the purpose of claiming the adoption credit is determined by the states or counties within the states.  You would need state certification that the child met the specific factors or conditions that your state uses to define special needs.

What are the provisions that allow an adoptive parent to claim the maximum adoption credit for a final adoption of a child with special needs without payment of any or very small expenses?

Answer: Internal Revenue Code section 36C(a)(3) (or, in nonrefundable years, section 23(a)(3)), provides that in the case of an adoption of a child determined by the state to have special needs, the taxpayer shall be treated as having paid qualified adoption expenses with respect to such adoption in an amount equal to the excess of the dollar limit over the aggregate adoption expenses actually paid or incurred with respect to such adoption.

 

FOREIGN ADOPTIONS

 

Can an adoptive parent take the adoption tax credit in 2012 for a Non-Hague Convention adoption that was final in 2011, pending approval of a U. S. visa for the child?

Answer: The adoptive parents can claim the credit on their 2011 return (which will be filed in 2012), even if they have not yet received a visa for the child.  The adoptive parents must attach all required documentation to the paper return clearly showing the adoption was final.  All documents must be translated into English before being sent to the Internal Revenue Service.

What documents are required to claim the adoption credit for a child from a country covered by the Hague Convention? Also, should the required documents be original or copies?

Answer:  For a foreign adoption from a country governed by the Hague Convention, one or more of the documents listed below should be attached to your return:

• The Hague Adoption Certificate (Immigrating Child), or
• The IH-3 visa, or
• A foreign adoption decree translated into English

Send copies, rather than original documents, to the Internal Revenue Service.

If a foreign country requires fees to be paid by the adoptive parent prior to completing the adoption, would the expenses be considered reasonable and necessary expenses for the purpose of claiming the adoption credit? Does the IRS require copies of the receipts to be attached to the original return?

Answer:  The fees would be considered qualified adoption expenses for the purpose of claiming the adoption credit if they are expenses directly related to, and for the principal purpose of, the legal adoption of an eligible child.

The IRS does not require receipts to be attached to the original return.  However, you should keep all receipts related to the adoption of an eligible child for your records.  The IRS may ask you at a later time to show your records of expenses paid.

 

DOCUMENTATION

 

I claimed an adoption credit, but did not submit any documentation with my return. What should I do?

Answer: For tax years 2010 and 2011, if the required documentation is not attached, your return will be selected for audit.  You will receive an audit letter requesting documentation to support your claim for adoption credit.

When amending multiple prior years’ tax returns, should each amended return be mailed in a separate envelope or can all the amended returns be mailed together in one envelope?

Answer: All the amended returns can be mailed together in one envelope.

If I filed my return over 8 weeks ago and have had no contact from IRS, what should I do?

Answer: If you have not received a letter indicating your return is being audited, you may use the tool, Where’s My Refund? or call 1-800-829-1040 for assistance.  

Is an audit completed on every return claiming the adoption credit or is auditing done on a random basis? 

Answer:  An audit is not completed on every return claiming the adoption credit.  Audit selection of adoption credit returns is not random, but is based on the information provided on the tax return and on Form 8839 and documentation submitted with the return, or the absence of this information.

Can adoption agencies provide families itemized letters of fees paid through the agency?  If so, please describe the details of the letter format (i.e., whether it needs to be notarized, on letterhead, etc.)

Answer: Yes, adoption agencies, at their discretion, can provide parents with such letters.  The letter must be on agency letterhead, and should include the following:

Names of adoptive parents and child
Amount(s) of the fees
Date(s) the fees were paid
Description of the purpose of the fees

Is a translation of receipts in a foreign language sufficient to meet the documentation requirement?  What exchange rate should be used? 

Answer: If your return is selected for audit and you are asked to verify qualifying adoption expenses, copies of receipts verifying these expenses should be provided.  If the receipts are in a foreign language, a translation should be included along with the copy of the original receipts.  The exchange rate that was in effect at the time the expenses were paid should be used to calculate the adoption credit amount. 

 

Additional information:

Adoption Credit FAQs     

Page Last Reviewed or Updated: 30-Oct-2012