25.14 Claiming the Adoption Credit on Form 8839

The fact that you paid qualified adoption expenses during 2012 does not mean that you can claim a credit for those costs on your 2012 return. A 2012 credit is not allowed for 2012 expenses unless the adoption was finalized by the end of the year. Under the credit timing rules discussed below, you may claim a 2012 credit for expenses incurred in 2011 if the eligible child was a U.S. citizen or resident when the adoption effort began. If the child was not a U.S. citizen or resident when the adoption effort began, a credit is not allowed until the year the adoption is finalized even if you incurred expenses in one or more previous years.

If a credit is allowed for 2012, figure it on Form 8839 and attach the form to your Form 1040. You must enter an identification number for the child on Form 8839. Generally this is a Social Security number (SSN), but if you are in the process of adopting a child who is U.S. citizen or resident and you cannot get an SSN for the child before you file your return, you should apply for an adoption taxpayer identification number (ATIN) on IRS Form W-7A. If the child is not eligible for an SSN, apply for an individual identification number (ITIN) on Form W-7.

Because of the documentation (see below) that must be attached to Form 8839, you cannot e-file your 2012 return if you claim the adoption credit; you must file a paper return.

When to claim the adoption credit for a child who is a U.S. citizen or resident (U.S. child).

If at the time the adoption effort begins the child is a U.S. citizen or resident and you pay qualifying expenses in any year before the year the adoption becomes final, the credit is delayed one year. The credit is allowed in the year after the year of the payment, whether or not the adoption is final in that year. If you pay qualifying expenses in the year the adoption becomes final, the credit for those expenses is claimed in that year. If qualifying expenses are paid in any year after the year in which the adoption becomes final, the credit is claimed in the year of payment.

When to claim the adoption credit for a child who is not a U.S. citizen or resident (foreign child).

If you adopt a child who is not a U.S. citizen or resident at the time the adoption effort begins, a credit may not be claimed until the year the adoption becomes final. If adoption expenses are paid after the tax year in which the adoption became finalized, a credit for such expenses is allowed for the tax year of payment.

The IRS has released safe harbors for determining the finality of an adoption of a foreign-born child and thereby the timing of a credit. These safe harbors apply only to adoptions of foreign-born children who receive an “immediate relative” (IR) visa from the State Department. IR visas are issued to a foreign-born child entering the U.S. after a foreign court or government agency (with authority over child welfare) has granted an adoption or guardianship decree.

Adoptive parents who bring a foreign-born child into the U.S. with an IR-2 visa, an IR-3 visa, or an IR-4 (if a “simple” adoption) visa may treat the adoption as final in either the taxable year in which the foreign court or agency enters the adoption decree or in the taxable year in which a court in the parents’ home state enters a decree of “re-adoption” or the home state otherwise recognizes the foreign adoption decree, provided this occurs in one of the two years after the year in which the foreign court or agency enters its decree. If the child receives an IR-4 visa under a guardianship or legal custody arrangement, the adoption may not be treated as final for tax purposes until the year in which a court in the parents’ home state enters a decree of adoption.

Documentation requirement.

To support your adoption credit claim, you must attach documentation to your return. Keep in mind the timing rules for claiming the credit, which depend on whether you are adopting a U.S. child or foreign child (see above).

For a finalized domestic adoption, or a foreign adoption finalized in the U.S., a copy of the adoption order or decree must be attached to Form 8839. For a foreign adoption finalized abroad that is governed by the Hague Convention, attach a copy of either the Hague Adoption Certificate (IHAC), an IH-3 visa, or the foreign adoption decree translated into English. If the adoption was finalized in a country that is not a party to the Hague Convention, a copy of the translated adoption decree or an IR-2 or IR-3 visa must be attached. If a credit is claimed for a domestic adoption of a U.S. child that was not final by the end of the year, several types of documentation are acceptable, such as a copy of a court order placing the child with you for legal adoption, or a home study completed by an authorized placement agency or placement agreement from the agency. For the adoption of a U.S. child with “special needs,” as determined by the state in which the adoption occurs, attach a copy of the state determination. See the Form 8839 instructions for further documentation details.

Credit limitations.

The maximum adoption credit on a 2012 return is $12,650 per child, but the limit is subject to a phaseout based on modified adjusted gross income.

The $12,650 credit limit is per child, not per taxpayer. If unmarried parents each paid expenses to adopt the same child and the expenses are allowed in 2012 under the credit timing rules, the parents must divide the $12,650 limit between them.

If under the credit timing rules you are claiming adoption expenses for a child on Form 8839 for 2012, but you claimed expenses for the same child in an earlier year, the earlier expenses reduce the $12,650 maximum credit for 2012. If under the credit timing rules you are allowed a 2012 credit for more than one child, a separate $12,650 limit applies for each. However, if an adoption of a child with special needs is finalized in 2012, the maximum $12,650 credit is allowed even if this amount exceeds your qualified adoption expenses; see below.

Phaseout.

The credit may be reduced or eliminated by a phaseout rule based on modified adjusted gross income (MAGI). For 2012, the phaseout applies if MAGI is over $189,710, and the credit is completely phased out if MAGI is $229,710 or more.

Special needs adoption.

An adoption is considered a “special needs” adoption if the child is a U.S. citizen or resident when the adoption process begins, and a state (or District of Columbia) determines that the child cannot or should not be returned to his or her parents and that because of special factors, assistance is required to place the child with adoptive parents.

A special rule allows qualifying expenses to be grossed up to the maximum credit in the year the adoption is finalized where the aggregate of qualifying expenses for that year and all prior years is under the maximum. For example, if a special needs adoption is initiated in 2011 and finalized in 2012 and actual qualifying expenses for both years are $9,020, a $12,650 credit may be claimed for 2012 (subject to the phaseout rule). Total expenses are deemed to be the $12,650 maximum, so the credit for 2012 includes not only the $9,020 of actual expenses, but also an additional $3,630, the excess of $12,650 over the actual expenses. This special rule applies only to finalized special needs adoptions.