IRS Definitions and Explanations

What you need to know
IRS definitions and explanations

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Important Change for 2006

Dollar limit increased. For 2006, the maximum credit increases to $10,960. Also, the maximum exclusion from income of benefits under your employer's adoption assistance program increases to $10,960.

For Adoptive Parents

You may be able to take a tax credit of up to $10,960 for qualifying expenses paid to adopt an eligible child. The adoption credit is an amount that you subtract from your tax liability.

Also, up to $10,960 paid or reimbursed by your employer for qualifying adoption expenses under an adoption assistance program may be excludable from your gross income. (However, you cannot exclude this adoption assistance if your employer is an S corporation in which you own more than 2% of the stock or stock with more than 2% of the voting power.) An adoption assistance program for this purpose is a separate written plan set up by an employer to provide adoption assistance to its employees. See Adoption assistance program under For Employers, later, for more information.

You may claim both a credit and an exclusion for expenses of adopting an eligible child. For example, you may be able to claim a credit of up to $10,960 and also exclude up to $10,960 from your income. However, you cannot claim both a credit and an exclusion for the same expense.

Qualifying Expenses

Qualifying adoption expenses are reasonable and necessary adoption fees, court costs, attorney fees, traveling expenses (including amounts spent for meals and lodging) while away from home,and other expenses directly related to, and whose principal purpose is for, the legal adoption of an eligible child.

Nonqualifying expenses.

Qualifying adoption expenses do not include expenses:

That violate state or federal law,
For carrying out any surrogate parenting arrangement,
For the adoption of your spouse's child,
Paid using funds received from any federal, state, or local program,
Allowed as a credit or deduction under any other federal income tax rule, or
Paid or reimbursed by your employer or otherwise (except that amounts paid or reimbursed under an adoption assistance program may be qualifying expenses for the exclusion).