Adoption credit.   Use Form 8839, Part II, to figure the adoption credit you can take on Form 1040, line 71, checkbox b or Form 1040NR, line 67, checkbox b. You may be able to take this credit in 2011 if any of the following statements are true.

Income exclusion for employer-provided adoption benefits.   Use Form 8839, Part III, to figure the employer-provided adoption benefits you can exclude from your income on Form 1040, line 7, or Form 1040NR, line 8. You may be able to exclude these benefits from income if your employer had a qualified adoption assistance program (see Employer-Provided Adoption Benefits, later) and any of the following statements are true.

  For purposes of calculating the adoption credit in Part II, qualified adoption expenses (defined later) do not include expenses reimbursed by an employer under a qualified adoption assistance program (see Employer Provided Adoption Benefits, later). For this reason, you must complete Form 8839, Part III, before you can figure the credit, if any, in Part II.

  

You cannot exclude employer-provided adoption benefits if your employer is an S corporation in which you own more than 2% of the stock or stock with more than 2% of the voting power.

Income limit.   The income limit on the adoption credit or exclusion is based on modified adjusted gross income (MAGI). For 2011, use the following table to see if the income limit will affect your credit or exclusion.

Note on welfare benefits and the adoption credit.   Any refund you receive as a result of taking the adoption credit cannot be counted as income when determining if you or anyone else is eligible for benefits or assistance, or how much you or anyone else can receive, under any federal program or any state or local program financed in whole or in part with federal funds. These programs include Temporary Assistance for Needy Families (TANF), Medicaid, Supplemental Security Income (SSI), and Supplemental Nutrition Assistance Program (food stamps). In addition, when determining eligibility, the refund cannot be counted as a resource for at least 12 months after you receive it. Check with your local benefit coordinator to find out if your refund will affect your benefits.

An eligible child is:

If you and another person (other than your spouse if filing jointly) adopted or tried to adopt an eligible U.S. child, see the instructions for line 2 (or line 13, if applicable), later, before completing Part II (or Part III).

Qualified adoption expenses are reasonable and necessary expenses directly related to, and for the principal purpose of, the legal adoption of an eligible child.

Qualified adoption expenses include:

Qualified adoption expenses do not include expenses:

In most cases, employer-provided adoption benefits are amounts your employer paid directly to either you or a third party for qualified adoption expenses under a qualified adoption assistance program. But see Children with special needs, later. A qualified adoption assistance program is a separate written plan set up by an employer to provide adoption assistance to its employees. For more details, see Pub. 15-B, Employer's Tax Guide to Fringe Benefits.

Employer-provided adoption benefits should be shown in box 12 of your Form(s) W-2 with code T. Your salary may have been reduced to pay these benefits. You may also be able to exclude amounts not shown in box 12 of your Form W-2 if all of the following apply.

The following examples help illustrate how qualified adoption expenses and employer-provided adoption benefits apply to the maximum adoption credit allowed.

You may be able to take the credit or exclusion if all of the following apply.

Child who is a U.S. citizen or resident (U.S. child).   If the eligible child is a U.S. citizen or resident, you can take the adoption credit or exclusion even if the adoption never became final. Take the credit or exclusion as shown in the following tables.

  

If you adopt a U.S. child with special needs, you may be able to exclude up to $13,360 and claim a credit for additional expenses up to $13,360 (minus any qualified adoption expenses claimed for the same child in a prior year). The exclusion may be available, even if you or your employer did not pay any qualified adoption expenses, provided the employer has a written qualified adoption assistance program. See the instructions for line 1, column (d), later, for more information.

Foreign child.   If the eligible child is a foreign child, you cannot take the adoption credit or exclusion unless the adoption becomes final. A child is a foreign child if he or she was not a citizen or resident of the United States (including U.S. possessions) at the time the adoption effort began. Take the credit or exclusion as shown on the following tables.

  

  If your employer makes adoption assistance payments in a year before the adoption of a foreign child is final, you must include the payments in your income in the year of the payment. Then, on your return for the year the adoption becomes final, you can make an adjustment to take the exclusion.

  

Your employer is not required to withhold income tax on payments for qualifying expenses under an adoption assistance program. If you must include the payments in income in the year paid because your adoption of a foreign child is not final, your withholding may not be enough to cover the tax on those payments. You may need to give your employer a new Form W-4 to adjust your withholding or make estimated tax payments to avoid a penalty for underpayment of estimated tax.