Extension and Expansion of Adoption Tax Benefits

The provisions of this new tax law is generally effective for tax years beginning in 2002. The provisions that extend the tax credit and exclusion from income for special needs adoptions regardless of whether the taxpayer has qualified adoption expenses are effective for tax years beginning in 2003.

The new tax law permanently extends the adoption credit to ALL children. The maximum credit is increased to $10,000 per eligible child, including a child with special needs. An automatic $10,000 credit is provided in the year a special needs adoption is finalized regardless of whether the taxpayer has any qualified adoption expenses.

SPECIAL NOTE: The "Job Creation and Worker Assistance Act of 2002" has clarified expenses paid or incurred PRIOR to December 31, 2001, are still subject to the prior $5,000 limitation!

The income phase-out for claiming this credit is DOUBLED from $75,000 to $150,000 of modified adjusted gross income. Finally, the adoption credit is allowed against the alternative minimum tax (AMT) permanently.

The new tax law also permanently extends the exclusion from income of employer-provided adoption assistance. The maximum exclusion is increased to $10,000 per eligible child, including a special needs child. In the case of a special needs child adoption, the $10,000 exclusion is automatically provided regardless of whether the taxpayer has qualified adoption expenses.

NOTE: The $10,000 exclusion amount will be increased in future tax years for inflation adjustments.

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