Federal Income Tax Credit for Adoptive Families

Great news for adopting parents! Beginning in 2002, the federal income tax credit for adopting families was expanded. Under the new law, individuals adopting a child may receive a maximum tax credit of $10,000 for qualified expenses incurred after January 1, 2002. Qualified expenses include any expenses reasonable and necessary and directly related to a legal adoption. Agency and attorney fees, expenses paid to the birthmother, and travel expenses may all be considered qualified expenses. Parents adopting special needs children need not incur expenses in order to claim the credit. To be considered a special needs child, the child must be a U.S. citizen or resident who a state has determined cannot or should not be returned to her parents and who has a specific factor or condition (such as minority, sibling group, or a medical condition) that makes it reasonable to conclude that the child cannot be placed with adoptive parents without adoption assistance.

The credit is subject to some limitations. The credit is reduced for taxpayers with a modified adjusted gross income over $150,000 annually. Generally, married adoptive parents must file a joint return. While the credit cannot exceed tax liability, any unused portion of the credit may be carried over for up to five years.

There are additional rules and limitations that are explained in detail in IRS publication 968, Tax Benefits for Adoption. To access that publication, visit www.irs.gov and click on publications.