Adopting a child is a stressful time for most parents. Finding a child to adopt can be very difficult and may take many months or years. There are many costs associated with adoption and the Internal Revenue Service (IRS) allows families who successfully adopt to take an adoption credit on their tax return. You need to keep meticulous records and consulting with a tax professional is always a good idea.
Step 1
File Form 8839 if you are going to claim the Adoption Tax Credit. The full credit is $10,960 per child. That is the full amount you can claim even if you spent more than that amount in pursuit of your adoption. In the case of special needs children, you may be able to claim that amount even if your expenses did not reach that level.
Step 2
Record all the expenses you have in pursuit of adopting the child. This may include lawyer fees, homestudy fees, newspaper advertising fees, travel fees and hiring an adoption consultant or agency. These fees are all legitimate adoption expenses and the IRS will approve these expenses as long as your record-keeping is solid. If you had to fly to a location on several occasions to facilitate your adoption, those expenses are deemed as reasonable and allowable.
Step 3
Set up an escrow account under your lawyer's direction for birth mother expenses. You cannot pay for a baby when you are legally adopting child. Both the legal system and the IRS take a dim view of adoptive parents who hand money to the birth mother. However, the birth mother may be in great financial need for items like food, shelter, clothing, healthcare as well as utilities. As an adoptive parent, it is in your best interest for the birth mother to be able to have these needs met. Your lawyer can set up and direct an escrow account. Adoptive parents can donate to this account but they cannot touch the money once it is in place. If this is done legally and correctly, money paid into these accounts can be part of the Adoption Tax Credit.
Step 4
Fill out Form SS-5 to get a Social Security number for your child as soon as the adoption has been completed. This will confirm to the IRS that your child is in your home and you have completed a successful adoption since your child's Social Security number will be listed on your tax return.
Step 5
Check with your individual state when it comes to additional Adoption Tax Credit. Each state has its own standards and services available when it comes to legal adoptions.
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