Expenses related to adoption paid for or reimbursed by your employer under a written, nondiscriminatory plan are tax-free up to $13,400 in 2015. Employer-provided adoption assistance can be for any child under the age off 18 or an individual physically or mentally incapable of caring for themselves.
Tax-free expenses include: adoption fees, attorney fees, court costs, travel costs, and any other expenses directly related to the adoption. An exception: adoption expenses for your spouse’s child or the costs of hiring a surrogate mother are considered taxable income.
The entire $13,400 tax-free amount is available for the adoption of a “special needs” child even if the actual costs are less than $13,400. A “special needs” designation is made by the state if they determine adoption assistance is required due to special factors (child’s physical condition or ethnicity).
Expenses for a child who is a not a U.S. citizen or resident are only tax-free in the year the adoption is finalized. For example, if you start the adoption process towards the end of 2015 but it is not completed until the beginning of 2016 then all reimbursements made during 2015 must be included in taxable income.
Tax Form 8839 is for Qualified Adoption Expenses, where you will report your employer’s payments and figure out the tax-free and taxable portions. All reimbursements for adoption will be included in Box 12 of Form W-2 with Code “T”. This total includes any pre-tax contributions you made under a cafeteria plan.
The deduction for adoption expenses starts to “phase out” once modified adjusted gross income (MAGI) exceeds $201,010 in 2015. If MAGI is $241,010 or more in 2015 then the entire amount of employer-paid adoption assistance is considered taxable income.