Adoption Credit

Beginning in 1997, you may be able to take a new tax credit of up to $5,000 for qualifying expenses paid to adopt an eligible child. The credit can be as much as $6,000 if the expenses are for the adoption of a child with special needs.

Qualifying expenses. Qualifying 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 and 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.

Eligible child. An eligible child must be:

1. Under 18 years old, or
2. Physically or mentally incapable of caring for himself or herself.

Child with special needs. An eligible child is a child with special needs if he or she is a citizen of the United States (including the District of Columbia and U.S. possessions) and a state determines that the child cannot or should not be returned to his or her parents' home and probably will not be adopted unless adoption assistance is provided to the adopted parents. A foreign child cannot be treated as a child with special needs. Factors used by states to determine if a child has special needs could include:

• The child's ethnic background,
• The child's age,
• Whether the child is a member of a minority or sibling group, or
• Whether the child has a medical condition or physical, mental, or emotional handicap.

How to claim the credit. To claim the credit you must complete Form 8839 and attach it to your Form 1040 or Form 1040A. Enter the credit on line 42, Form 1040 or line 24c Form 1040A. For more information, including income limits that may affect the credit, get Publication 968.