Dollar Limits on Adoption Expenses
The dollar limits for both the exclusion of employer-paid adoption expenses and the tax credit apply "per adoption effort." Therefore, if your adoption spans two or more years, you can only claim total credits of $12,970 over all the years that you paid expenses. Also, you can only exclude $12,970 in employee benefits, if your employer provides an adoption assistance plan.
If the child is a U.S. citizen or resident, you can claim the tax benefits whether or not your adoption effort is successful. However, if you attempt to adopt one child and the adoption falls through, upon which you attempt to adopt another child, the entire chain of events counts as one "adoption effort." If you adopt two (or more) children, each child's adoption would count as a separate adoption effort even if you adopt the children at the same time (for example, if you adopt a sibling group).
Phaseout of benefits at higher income levels. To determine whether your income is high enough to cause you to lose some of the adoption benefits, add up your adjusted gross income as shown on Line 37 of Form 1040. Qualified adoption expenses can no longer be claimed on Form 1040A. You must add to this amount the amount of any tax-free adoption benefits you received from your employer, and also any foreign earned income exclusion, foreign housing exclusion or deduction, or excluded income from U.S. possessions.
If your AGI, as modified above, is $194,580 or less, you qualify for the entire dollar amount of the credit and/or exclusion. If your AGI is $234,580 or more in 2013, you won't qualify at all. If your AGI is in between these amounts, your credit and exclusion will both be reduced in proportion to how high your income is in relation to the phaseout range. By working through IRS Form 8839, Qualified Adoption Expenses, you'll compute the limitation if one applies.
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Example
If your 2013 modified AGI is $204,580, the amount that exceeds $194,580 is $10,000. Since $10,000 is 1/4 of the phaseout range, you will lose 1/4 of the adoption credit and also 1/4 of the exclusion, so the maximum benefit you could claim for either the exclusion or credit for a non-special-needs child would be $9,727.50. If you were eligible for both the credit and exclusion, you could claim a maximum of $19,455 in total benefits.
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