There are 2 tax benefits available to adoptive parents:
Adoption Credit. If you paid qualifying adoption expenses during 2007, you might qualify for a credit of up to $11,390 for each child that you adopted. The amount of the credit that you can take depends on your income. The credit is reduced if your adjusted gross income is more than $170,820, and eliminated entirely if you earn more than $210,820.
Adoption Benefits Exclusion. If your employer has an adoption assistance program, you can exclude up to $11,390 from your income in 2007. The income limits listed above apply to this tax benefit as well. Your employer will report these benefits to you in box 12 of your W-2 and mark it with the code "T."
You can claim both the credit and the exclusion for expenses related to adopting a child, but you can’t claim both for the same expenses. If you’re adopting a child with special needs and your employer has an adoption assistance program, you might be able to take advantage of both benefits. In adoption cases, the state determines whether or not the child you’re adopting is a special needs child.
If you’re married filing a separate return, you can’t take the adoption credit or the adoption benefits exclusion unless all of the following requirements apply:
You lived apart from your spouse during the last 6 months of 2007;
Your adopted child lived in your home for more than half of 2007; and
You provided more than half the cost of maintaining your home.
Use Form 8839 to report your adoption expenses and claim the adoption credit or exclusion. Use the Interview to enter your adoption expenses and TaxCut will make sure that your expenses are reported correctly.
Qualifying expenses include adoption fees, court costs, attorneys’ fees, travel expenses, and other costs associated with the adoption. For your expenses to qualify for either the adoption credit or the adoption benefits exclusion, all of these must be true:
The adopted child must be under age 18 or disabled;
You paid the expenses in 2007; and
The adoption became final in 2007.
There is a special rule for foreign adoptions if you had employer-provided adoption benefits. Expenses for adopting your spouse’s child do not qualify.
To learn more, see the Form 8839 instructions or IRS Publication 968: Tax Benefits for Adoption.