Adoption Assistance From Employer

If you are interested in adopting a child, you may want to look into whether your employer offers adoption assistance through an adoption assistance program. The law allows your employer to provide you with up to $10,000 of adoption assistance tax free. The exclusion generally applies to certain qualifying adoption expenses paid or reimbursed by your employer. There is also an adoption credit of up to $10,000 for qualified adoption expenses (including special needs children). Adoption expenses for which your employer pays under an adoption assistance program may not be taken into account in determining the amount of the credit for adoption expenses. However, you can claim both the maximum adoption credit and the maximum tax-free assistance in connection with a single adoption.

Example 1: Jack and his wife, Diane, adopted a child in 2003. Jack's company paid $10,000 of qualified expenses for Jack and Diane's adoption. Jack and Diane paid another $12,500 of their own money toward the adoption. Their modified adjusted gross income (MAGI) is $75,000 for the year. Jack and Diane owe no tax on the $10,000 in benefits they received from Jack's company. In addition, Jack and Diane can claim an adoption credit for $10,000 of the $12,500 they paid themselves. If Jack and Diane's adoption expenses had totaled only $16,500 and Dick's company paid $10,000 through an adoption assistance program, they can claim a credit of only the remaining $6,500. Both the exclusion amount and the adoption credit are partially phased out for single and joint filers with MAGIs of $150,000 and phased out completely for single and joint filers once MAGI reaches $190,000. You cannot claim both a credit and a tax exemption for the same expense.