Adoption Tax Credits
excerpted from Publication 968, Tax Benefits for
for more information, please check out the Internal Revenue's website
For Adoptive Parents
You may be able to take a tax credit of up to $5,000 for qualifying expenses paid to adopt an eligible child. The credit can be as much as $6,000 if the expenses are for the adoption of a child with special needs. The adoption credit is an amount that you subtract from your tax liability.
Also, up to $5,000 ($6,000 for a child with special needs) paid or reimbursed by your employer for qualifying adoption expenses under an adoption assistance program may be excludable from your gross income. (However, you cannot exclude this adoption assistance if your employer is an S corporation in which you own more than 2% of the stock or stock with more than 2% of the voting power.) An adoption assistance program for this purpose is a separate written plan set up by an employer to provide adoption assistance to its employees.
You may claim both a credit and an exclusion for expenses of adopting an eligible child. For example, for an eligible child who is not a child with special needs, you may be able to claim a credit of up to $5,000 and also exclude up to $5,000 from your income. However, you cannot claim both a credit and an exclusion for the same expense.
Qualifying adoption expenses are reasonable and necessary adoption fees, court costs, attorney fees, traveling expenses (including amounts spent for meals and lodging) while away from home, and other expenses directly related to, and whose principal purpose is for, the legal adoption of an eligible child.
Nonqualifying expenses. Qualifying adoption expenses do not include expenses:
Eligible child. An eligible child must be:
Child with special needs. An eligible child is a child with special needs if he or she is a citizen or resident of the United States (including the District of Columbia and U.S. possessions) and a state determines that the child cannot or should not be returned to his or her parents’ home and probably will not be adopted unless adoption assistance is provided to the adoptive parents. A foreign child cannot be treated as a child with special needs. Factors used by states to determine if a child has special needs could include:
If your state has determined that the child you are adopting is a child with special needs, you should keep evidence of that fact for your records.
New Rules for 2002
Beginning in 2002, there are significant changes to the credit and exclusion.
Credit and exclusion extended. The credit, which was scheduled to end after 2001 (except for children with special needs), has been extended. The exclusion, which was also scheduled to end after 2001, has also been extended.
Amount of credit and exclusion increased. In general, the maximum credit and exclusion will increase to $10,000 beginning in 2002.
Beginning in 2003, a $10,000 credit or exclusion will be allowed for the adoption of a child with special needs regardless of whether the taxpayer has qualifying expenses.
NOTE: At the time this publication was being prepared for print, Congress was considering legislation make this provision for special needs adoptions effective for 2002.
Income limit. The income limit will also increase. The following table shows whether the income limit will affect the credit or exclusion.
|IF your modified AGI is ...||THEN the income limit ...|
|$150,000 or less||will not affect your credit or exclusion|
|$150,001 to $189,999||
will reduce your credit or exclusion
|$190,000 or more||will eliminate your credit or exclusion|
Expenses paid before 2002. Prior-law dollar limits continue to apply to expenses paid before 2002.
Example. To adopt a child without special needs, you pay $7,000 of qualified adoption expenses in 2001 and $3,000 of qualified adoption expenses in 2002. The adoption becomes final in 2002. The maximum amount of expenses you can take into account for this adoption is $8,000 ($5,000 from 2001 plus $3,000 from 2002).
Year credit allowed. The credit for adoption of a child
with special needs will be allowed in the year the adoption becomes final,
regardless of when any qualifying expenses are paid.
NOTE: At the time this publication was being prepared for print, Congress was considering legislation to eliminate this provision.
Credit allowed against alternative minimum tax. The provision presently in effect allowing the credit to reduce alternative minimum tax as well as regular income tax has been extended. This provision was originally scheduled to expire in 2002.