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 Qualified Adoption Expenses

Adoptive parents may be able to take adoption expense tax credit and/or an adoption assistance exclusion.  File Form 8839, Qualified Adoption Expenses, to claim the credit or exclusion.

Beginning in 2002, the credit and the exclusion will be permanent provisions for all adoptions of eligible children.  Under prior law, the credit and exclusion was scheduled to terminate for expenses paid or incurred after 2001, with an exception for adoptions of children with special needs.

Dollar limitation increased and indexed.  Beginning in 2002, the dollar limitation is increased to $10,000 for each eligible child, regardless of whether or not the child has special needs.  Under prior law, the dollar limitation was $5,000 for each eligible child without special needs and $6,000 for each eligible child with special needs.  The $10,000 limitation amount will be indexed for inflation after 2002. The dollar limitation for year 2003 is $10,160, for year 2004 is $10,390, for year 2005 is $10,630, for 2006 is $10,960 and for year 2007 is $11,390.

AGI limitation increased and indexed.  Beginning in 2002, the credit and exclusion begins to be phased out for taxpayers with modified AGI over $150,000 (and is completely phased out for modified AGI of $190,000).  Under prior law, the phase-out was applied to taxpayers with modified AGI between $75,000 and $115,000.  The $150,000 beginning phase-out amount will be indexed for inflation after 2002.  In year 2003 the phase-out begins with modified AGI over $152,390 and is completely phased out at modified AGI of $192,390 or more. In year 2004 the phase-out begins with modified AGI over $155,860 and is completely phased out at modified AGI of $195,860 or more. In year 2005 the phase-out begins with modified AGI over $159,450 and is completely phased out at modified AGI of $199,450 or more. In year 2006 the phase-out begins with modified AGI over $164,410 and is completely phased out at modified AGI of $204,410 or more. In year 2007 the phase-out begins with a modified AGI over $170,820 and is completely phased out at modified AGI of $210,820 or more.

Qualifying Individual

An eligible child must be:

  • Under age 18, or
  • Physically or mentally incapable of caring for himself/herself.

An eligible special needs child must be:

  • Citizen or resident of U.S. (including U.S. possessions), and
  • State must determine the child cannot or should not be returned to parents’ home, and unless adoption assistance is provided to the adoptive parents, the child will probably not be adopted due to a specific factor or condition.

Qualified Adoption Expenses

Expenses include reasonable and necessary adoption fees, court costs, attorney fees, traveling expenses while away from home and other expenses directly related to the legal adoption of an eligible person.

Tax Year Credit Can Be Taken

Domestic adoption:

  • Expenses paid in a year prior to the year adoption is finalized.  Credit allowed in the year after the year expense is paid.
  • Expenses paid during or after the year adoption is finalized.  Credit allowed for year in which expense is paid.

Foreign adoption:

  • Credit available only if foreign adoption is final.
  • Expenses paid in a year prior to or during the year adoption is finalized.  Credit allowed in the year the adoption is finalized.
  • Expenses paid in a year after adoption is finalized.  Credit allowed in the year of payment.

Tax Year Exclusion Can Be Taken

Domestic adoption:  Exclusion allowed in the year the employer pays the expenses.

Foreign adoption:

  • Exclusion available only if foreign adoption is final.
  • Expenses paid in a year prior to or during the year adoption is finalized.  Exclusion allowed in the year adoption is finalized.
  • Expenses paid in a year after adoption is finalized.  Exclusion allowed in the year of payment.

The above information supplied by:

Riley, Rodzianko & Clymer LLP, CPA’s

1226 West Broad Street

Quakertown, PA 18951

 (215) 536-1372