Claiming the Adoption Exclusion or Credit

If you are married, you must file a joint return with your spouse to claim either the adoption tax credit or the exclusion for employer-reimbursed adoption expenses, unless (1) you are legally separated, or (2) you have lived apart from your spouse for the last six months of the year and your home is the child's home for more than half the year, and you paid more than half the cost of keeping up your home for the year.

Both the exclusion of employer-paid adoption benefits and the tax credit for adoption must be claimed on IRS Form 8839, which must be attached to Form 1040.

The exclusion is claimed on Part III of the form. Note that any employer-paid benefits are excluded from income taxation, but are still taxable for purposes of Social Security and Medicare tax. The total amount of adoption benefits you received should be shown in Box 12 of your W-2 Form. If your employer excluded more benefits than you are entitled to (for example, because your spouse is employed, thus raising your AGI above $194,580), you may have to add some of the amount in Box 12 to your taxable wages shown in Box 1.

You should generally claim the exclusion in the year your employer pays you for the expenses, but for foreign adoptions, you must claim the exclusion in the later of the year the adoption becomes final or the year of the payment. Unsuccessful foreign adoptions don't qualify for the exclusion.

The tax credit is claimed on Part II of the form. For adoptions of children that are U.S. citizens or residents, you may claim expenses in the year after they are paid or the year the adoption is final, whichever is earlier. If you pay expenses in a year after the year the adoption is final, claim the credit for those expenses in the year you pay them. Again, if the child is a foreign child, you must claim the expenses in the later of the year the adoption becomes final, or the year you paid them. Unsuccessful foreign adoptions do not qualify for the credit.

Carryovers of unused credits. The adoption tax credit is subtracted from your income tax liability, after the subtraction of any credit for child and dependent care expenses, any credit for the elderly or disabled, any mortgage interest credit, and the education credits. If your tax liability is not all that large to begin with, you may find that you're not able to take full advantage of all your credits.

If that is the case, any unused portion of your adoption tax credit for 2014 can be carried over to the next year to be subtracted from your 2014 tax liability. If there are still unused portions of the credit, you can carry it forward for up to four more years.

Child's identification number. If your adoptive child cannot obtain a Social Security number, or an ITIN for a resident or nonresident alien, you must obtain an adoption taxpayer identification number by completing IRS Form W-7A, which you can obtained by downloading it from the IRS website or by calling 1-800-TAX-FORM.

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