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Tax Tip of the Week
For the week of
September 2, 2002

Offset adoption expenses with these tax breaks

The cost of adopting a child can be staggering. Fortunately, the tax law contains several tax breaks to help offset your expenses.

Use the adoption tax credit to offset income taxes. Adoptive parents can claim a tax credit for up to $10,000 of adoption expenses for each eligible child. The credit begins to phase out once your adjusted gross income reaches $150,000.

Eligible expenses include agency fees, court costs, attorney's fees, travel expenses, and other expenses directly related to the legal adoption of an eligible child. This credit does not apply to expenses for adopting a spouse's child.

Exclude employer adoption assistance from your income. If your employer pays for your adoption expenses, you can exclude up to $10,000 of employer assistance from your income.

Both the tax credit and the income exclusion can be used for the same child, but they can't cover the same expenses. In other words, you may be able to claim up to a $10,000 credit and also exclude up to $10,000 in adoption assistance from your income.

Special rules apply to adopting a special needs child. Beginning in 2003, a $10,000 tax credit or income exclusion will apply to a special needs adoption even if you don't have qualified adoption expenses.

It pays to know the tax rules. The rules are different for domestic adoptions, foreign adoptions, and special needs adoptions. Whether you are thinking about adoption or you are in the process of adopting a child, it pays to know the tax rules.

Contact us if you have questions about adoption tax benefits.

Prior Tax TipsClick here to view previous tax tips.

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