What year do I claim adoption expenses and how do I claim adoption fundraisers and grants

[jdp32]

I have multiple questions related to adoption.

In 2015, we started the process to adopt with a new agency. We spent a good bit of money. In 2016, we had a child placed with us and paid the cost of the adoption. The adoption was not yet finalized. In 2016, we were told we couldn't claim 2015 expenses for an unfinalized adoption, but could claim adoption expenses from 2014.
1. What expenses qualify as adoption expenses? Travel expenses, application expenses, Homestudy expenses, Homestudy renewal expenses etc.
2. Can we claim unfinalized adoption expenses from 2015 on our 2016 return?
3. Can we claim our unfinalized adoption expenses from 2016 on our 2016 return?

Also, to help with our adoption expenses, we applied for a couple grants and did some fundraisers. So far, all grants received have been issued directly to our adoption agency, and they have issued us a refund. The fundraiser we did was through youcaring/PayPal. Most of the donations were received by PayPal in 2016, but we did not withdraw the funds from PayPal until 2017.
1. I am assuming that grants issued as refunds from the adoption agency do not qualify as income, they simply reduce the amount of expenses we can deduct, correct?
2. Do I treat the PayPal fundraiser the same way, or as income? If I treat it as income, do I declare it in 2016 when PayPal received it, or in 2017 when we received it?

[MaryK1 · Accepted solution]

Qualified adoption expenses (defined in section 23(d)(1) of the IRC) include:

• Reasonable and necessary adoption fees,
• Court costs and attorney fees,
• Traveling expenses (including amounts spent for meals and lodging while away from home), and
• Other expenses that are directly related to and for the principal purpose of the legal adoption of an eligible child.

The expenses you listed are good.  (Travel expenses, application expenses, Homestudy expenses, Homestudy renewal expenses). 

You claim the expenses in the year you incurred them or the year the adoption is finalized-- so you can claim the 2015 expenses in 2016, but you can claim the 2016 expenses only if the adoption is final. 

Two important things to realize is all expenses apply to the max credit allowed and it is a nonrefundable credit so it can only be used to reduce your tax liability.  If there is any unused credit, you can carry it forward up to five years

The grants and paypal are not taxable income because they are gifts, but you would have to reduce any expenses claimed for the credit by the amount paid by the grant.