Qualifying Expenses for Adoption Benefits

For both of the adoption expense tax breaks (the exclusion of employer-reimbursed expenses and the tax credit), adoption expenses are defined in the same way. They include reasonable and necessary:

• adoption fees
• court costs
• legal fees
• traveling expenses (including meals and lodging)
• other expenses directly related to the legal adoption of an eligible child

The child must be under 18 years old, or physically or mentally incapable of self-care. You can't deduct expenses for adoptions that violate state law, that involve surrogate parent arrangements, that involve adopting your spouse's child, or that are allowed as a credit or deduction under any other federal income tax rule (for example, medical expenses that can be claimed as itemized deductions are not adoption expenses).

If eligible, you can take advantage of both the employer-provided benefits and the adoption tax credit, but you can't use the same expenses to qualify for two different tax breaks.

For 2014, $13,190 ($13,400 for 2015) is also allowed as an adoption credit and as an exclusion from income in the case of a special needs child even if there are no qualified adoption expenses.

Example In 2014, the adoption of your son was finalized, and you had paid a total of $15,000 in qualified expenses for the adoption. Your employer reimbursed you for $12,970 of your expenses. This amount can be excluded from your income. Also, you can claim a tax credit for the other $2,030 in qualified expenses in 2013.

Special needs children. To be considered a special needs child, a state must determine that the child cannot or should not live with his or her parents, and that unless financial assistance is provided, it's unlikely that the child will be adopted because of factors such as the child's ethnic or minority background, the child's age, the fact that the child is a member of a sibling group, or the child's medical condition or mental or physical handicap.

The special needs foreign child adoption provisions expired at the end of 2001. However, the provisions for adoption of U.S. special needs children continues.

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