Federal Adoption Credit
An individual will be allowed a credit against income tax (and alternative minimum tax) for qualified adoption expenses. Note that for tax year 2011, the credit is refundable, so that if your income tax liability is not equal to the credit to which you are entitled, the federal government will refund the difference to you. The credit is available for each child adopted and for expenses incurred in any failed adoption. It is generally available in a relative adoption, but not in a stepparent adoption. This may be good news for unmarried partners who choose to adopt each other's children, as the credit should be allowed in such adoptions.

For tax year 2011 The federal adoption tax credit has been increased to a maximum of $13,360. More importantly, for tax year 2011 the credit is now "refundable," which means that even families that owe zero taxes can receive the full tax credit in the form of a tax refund, to help with adoption-related expenses. In non-special needs adoptions, taxpayers still need to support the credit with qualified adoption expenses. For a special needs adoption, the full credit is available for each adopted child regardless of actual expenses.

For tax year 2012 The maximum federal adoption tax credit, which is adjusted each year based on cost of living allowance, is reduced to $12,650. The full credit is available to taxpayers with modified adjusted gross income of $189,710 or less and phases out to zero for modified adjusted gross income of $229,710. The refundability of the tax credit has been repealed; it can only be taken as a credit against taxes owed.

For tax year 2013 The adoption tax credit expires on December 31, 2012, unless Congress acts this year to extend it.

Note that the IRS does not allow the tax credit in stepparent adoptions, when a person adopts his or her spouse's child. However, the IRS has allowed the tax credit in the case of unmarried same-sex couples where one partner adopts the other partner's child. It's likely then that the tax credit also would be available in second-parent adoptions involving unmarried heterosexual couples.

Federal Adoption Exclusion
The amounts of the applicable exclusion for adoption assistance benefits provided by an employer are the same as those for the adoption credit.

Forms and Resources

Rules and information from the IRS regarding the 2010 and 2011 Tax Credit
- www.irs.gov/pub/irs-drop/n-10-66.pdf
- www.irs.gov/taxtopics/tc607.html
- IRS instructions for Form 8839 for tax year 2011 - Form 8839 for 2011 and instructions

State Tax Credit/Exclusion
In addition to the federal adoption tax credit, your state may offer a tax credit or exclusion. Check with your accountant or attorney to determine whether a state tax credit or exclusion may be available to you.

Important Disclaimer
The information in this page is not intended and should not be relied upon as legal advice. As always, in order to determine whether a tax credit or exclusion is available in any specific situation, you should consult your accountant, attorney, or tax advisor.