When to claim the credit or take the exclusion

If the qualifying expenses are paid before the year the adoption becomes final, the credit is claimed for the year after the one in which the expenses are paid.

 If the expenses are paid in the year the adoption becomes final or in a later year, the credit is claimed for the year in which the expenses are paid. For example, say $3,000 was paid in 2006, $2,000 in 2007, and $4,000 in 2008, when the adoption becomes final. The taxpayer claims a $3,000 credit in 2007 (for the 2006 expenses). The $2,000 of 2007 expenses and the $4,000 of 2008 expenses are combined to be claimed in 2008. Employer-provided adoption benefits are excludable from the employee's gross income for the year in which the employer pays the qualified adoption expense. In the case of a foreign adoption, neither the credit nor the exclusion may be taken until the year in which the adoption becomes final. Adoption credit is nonrefundable: The adoption credit is a nonrefundable credit. That is to say that the IRS will not refund more than the amount you have actually paid in taxes in any given year. The amount of the credit can't exceed the sum of your regular and alternative minimum tax, reduced by the sum of your other nonrefundable credits. Thus, while the credit can reduce your tax, it won't cause you to get a refund check when you have paid not taxes, but an unused credit can be carried over for up to five years until it is used in full. 

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