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Originally Posted By Bonnie

ADOPTION TAX CREDITS AND EXEMPTIONS BECOME LAW
By Steve Humerickhouse
Legislation awarding tax credits and tax exemptions for adoptive families was became law on August 1, 1996 as part of the "Small Business and Job Protection Act" (H. R. 3448) that raised the minimum wage. The tax provisions contained in the law are similar to those in the "Adoption Promotion and Stability Act" (H. R. 3286) passed by the House on May 10. 1996. The new law includes the following provisions:

Amount of Adoption Tax Credit

The law provides a tax credit of up to $5,000 for expenses incurred or paid in the adoption of child and $6,000 in the adoption of a child with special needs. Families with annual adjusted gross incomes under $75,000 would be eligible for the full tax credit, while those with incomes between $75,000 and $115,000 could receive a partial tax credit.

If a family's tax bill is less than its adoption expenses, the difference could be deducted from future tax bills. The tax credit could be carried forward in this manner for a maximum of five years. Suppose the Simpson family incurs expenses of $10,000 in relation to the adoption of a child with special needs. The family earns $60,000 in 1997 and owes $2,000 in federal taxes. The $6,000 tax credit could be applied to reduce the 1997 tax bill to zero and the remaining $4,000 could be carried forward into future tax years.

Eligible Expenses

The new defines qualified expenses as "reasonable and necessary fees, court costs, attorney fees, and other qualified expenses which are directly related to the legal adoption of adoption of an eligible child by the taxpayer . . . . " The list of eligible costs for special needs adoptions includes "construction, renovations, alterations, or purchases specifically required . . . to meet the needs of the child."

Tax Exemption for Employer-Provided Adoption Assistance

The legislation also allows tax exemption of up to $5,000 for expenses incurred or paid in the adoption of child and $6,000 in the adoption of a child with special needs. Families with annual adjusted gross incomes under $75,000 would be eligible for the full tax credit, while those with incomes between $75,000 and $115,000 could receive a partial tax credit.

Tax Year and Time Limits

The adoption tax credit and tax exemption for employer-paid adoption assistance begins with the 1997 tax year. Unlike the H. R. 3286, the law ends the tax credit and tax exemption for all but special needs adoptions by December 21, 2001.

The tax credit and exemptions apply to the taxable year in which the adoption is finalized. Adoption expenses paid or incurred in 1998, for example, would apply to the 1999 tax year if the final decree of adoption was issued in that year. Costs incurred in late 1996, however, will not apply to 1997, the year the law takes effect.

International Adoptions

Families adopting children from foreign countries are eligible for the tax credit and tax exemption only if the adoption is finalized. The amount of both the tax credit and tax credited is also limited to $5,000 for both special needs and non-special needs adoptions. In addition, the tax credit and tax exemption for all international adoptions end on December 31, 2001.

Application

Families may use both the tax exemption and tax credit in the same tax year. Imagine that the Brady Family adopts a non special needs child and Mrs. Brady works for TOXICO, a company that provides $3,000 in adoption assistance. After deducting the $3,000, the Brady's gross income is $71,000 and the family's tax liability is $2,500. The Brady's outstanding adoption related expenses following the $3,000 in assistance from TOXICO amounts to $8,000. The family could apply the $5,000 tax credit to reduce its 1997 tax to 0 and carry the remaining $2,500 forward to future tax years.

The example above illustrates that in combining the tax exemption with the tax credit, a family may not claim the same adoption expenses twice. For example, if employer provided adoption assistance reduces a family's adoption costs from $10,000 to $8,000, only $8,000 would be eligible to applied toward the tax credit. Similarly, in the cases of special needs adoptions, if the family is eligible for reimbursement of non-recurring adoption expenses, it must subtract the amount of the reimbursed costs from the remaining expenses that are eligible for the tax credit.

Article provided by Adoption Advocates via the Adoption Policy Resource Center
(URL: http://www.fpsol.com/adoption/advocates.html).