Parents may be able to claim a one-time tax credit or tax exclusion of up to $5,000 for each adopted child (or $6,000 for each "special needs" child) for qualified adoption expenses. Parents can take the tax credit (that is, they can deduct it directly from the amount of any taxes they owe) for expenses they pay out of pocket. The tax exclusion applies to money they received from their employer to pay for adoption expenses.

Qualified adoption expenses include "reasonable and necessary" adoption fees, court costs, attorney's fees, traveling expenses (included meals and lodging) and other related adoption costs. Expenses cannot be claimed if the taxpayer is adopting a spouse's child or surrogate parenting is involved.

The tax credit or exclusion limit for these expenses is a per child limit, not a per year limit. For example, let's say you spent $2,000 in 1997 in qualified adoption expenses for a non-special needs child. You spend another $2,000 in 1998 and $3,000 in 1999 when the adoption becomes final. The rules say you have to wait one tax year to claim the expenses, except in the year the adoption becomes final. In this example, you can claim the $2,000 in 1997 expenses ore your 1998 tax return, and the $2,000 in 1998 expenses and $ 1,000 of the 1999 expenses on your 1999 return (for a total of $5,000). If your adoption was final in 1997, you can claim expenses incurred that year (up to the $5,000 limit) on your 1997 return. Any expenses incurred before 1997 cannot be claimed.

If you adopted a special-needs child, you can claim a total of $6,000 in credit. Special-needs children, sometimes called "waiting" or "hard to place" children, are children with a physical or mental disability, older children, minority children, or children with siblings also awaiting adoption. Most of them are in foster homes and have been determined by the state to be special-needs children.

Parents who adopt children abroad can take the same $5,000 tax credit; they can't take the $6,000 credit even if the foreign child is a special-needs child. However, they cannot take any credit until the year the adoption becomes final. So in the example above, they couldn't claim an credit until their 1999 tax return. Also, if the adoption falls through, they cannot take the credit. The credit for domestic adoptions can be taken even if the adoption doesn't work out.

Keep in mind several other points about taking this tax credit. The credits begin to phase out for families with adjusted gross incomes above $75,000 and disappears at $115,000. Unmarried couples are treated as a single taxpayer; each cannot claim the credit. If the tax credit for a given year is larger than the amount of taxes you owe that year, you can carry the unused credit over into the next year. You can do this for as long as five years. You also can take the child dependency deduction on your income-tax return, if you meet the rules. And finally, all adoption credits expire after the year 2001, with the exception of the adoption of special-needs children.

Similar rules apply to parents who receive adoption assistance from their employer. Limits vary from company to company: some might reimburse $1,000 or $2,000 in expenses for each adopted child, while others might pay $5,000 or more. Under the tax law, employer assistance (not exceeding the credit limits) is not counted as part of the employee's gross income, making this a taxfree benefit. However, the employee cannot "double dip" by claiming both a credit and the exclusion for the same expenses reimbursed by an employer.


February - 30- 1998