This copy of the new adoption tax credit legislation is provided for your own use - nothing on this page should be construed as tax advice, legal advice or the formation of an attorney-client relationship with the owner of this webpage.  The red portions of the page are intended to allow you to find portions of the law that may be relevant to the timing of the tax credit.  Your situation is unique - if you have questions, please contact an attorney in your area.
This is the "old" version of the adoption tax credit
SUBTITLE A--INCOME TAXES
CHAPTER 1--NORMAL TAXES AND SURTAXES
SUBCHAPTER A--DETERMINATION OF TAX LIABILITY
PART IV--CREDITS AGAINST TAX
SUBPART A--NONREFUNDABLE PERSONAL CREDITS
� 23. Adoption expenses
(a) Allowance of credit.--
(1) In general.--In the case of an individual, there shall be allowed as a credit against the tax imposed by this chapter the amount of the qualified adoption expenses paid or incurred by the
taxpayer.
(2) Year credit allowed.--The credit under paragraph (1) with respect to any expense shall be
This is the section of the old law that deals with timing.  It is section 23(a)(2).
allowed--
(A) in the case of any expense paid or incurred before the taxable year in which such adoption
becomes final, for the taxable year following the taxable year during which such expense is
paid or incurred, and
(B) in the case of an expense paid or incurred during or after the taxable year in which such
adoption becomes final, for the taxable year in which such expense is paid or incurred.
(b) Limitations.--
(1) Dollar limitation.--The aggregate amount of qualified adoption expenses which may be
taken into account under subsection (a) for all taxable years with respect to the adoption of a
child by the taxpayer shall not exceed $5,000 ($6,000, in the case of a child with special
needs).
(2) Income limitation.--
(A) In general.--The amount allowable as a credit under subsection (a) for any taxable year
(determined without regard to subsection (c)) shall be reduced (but not below zero) by an
amount which bears the same ratio to the amount so allowable (determined without regard to
this paragraph but with regard to paragraph (1)) as--
(i) the amount (if any) by which the taxpayer's adjusted gross income exceeds $75,000, bears
to
(ii) $40,000.
(B) Determination of adjusted gross income.--For purposes of subparagraph (A), adjusted
gross income shall be determined without regard to section 911, 931, and 933.
(3) Denial of double benefit.--
(A) In general.--No credit shall be allowed under subsection (a) for any expense for which a
deduction or credit is allowed under any other provision of this chapter.
(B) Grants.--No credit shall be allowed under subsection (a) for any expense to the extent
that funds for such expense are received under any Federal, State, or local program.
(c) Carryforwards of unused credit.--If the credit allowable under subsection (a) for any
taxable year exceeds the limitation imposed by section 26(a) for such taxable year reduced by
the sum of the credits allowable under this subpart (other than this section and section
1400C), such excess shall be carried to the succeeding taxable year and added to the credit
allowable under subsection (a) for such taxable year. No credit may be carried forward under
this subsection to any taxable year following the fifth taxable year after the taxable year in
which the credit arose. For purposes of the preceding sentence, credits shall be treated as
used on a first-in first-out basis.
(d) Definitions.--For purposes of this section--
(1) Qualified adoption expenses.--The term "qualified adoption expenses" means reasonable
and necessary adoption fees, court costs, attorney fees, and other expenses--
(A) which are directly related to, and the principal purpose of which is for, the legal adoption
of an eligible child by the taxpayer,
(B) which are not incurred in violation of State or Federal law or in carrying out any surrogate
parenting arrangement,
(C) which are not expenses in connection with the adoption by an individual of a child who is
the child of such individual's spouse, and
(D) which are not reimbursed under an employer program or otherwise.
(2) Eligible child.--The term "eligible child" means any individual--
(A) who--
(i) has not attained age 18, or
(ii) is physically or mentally incapable of caring for himself, and
(B) in the case of qualified adoption expenses paid or incurred after December 31, 2001, who
is a child with special needs.
(3) Child with special needs.--The term "child with special needs" means any child if--
(A) a State has determined that the child cannot or should not be returned to the home of his
parents,
(B) such State has determined that there exists with respect to the child a specific factor or
condition (such as his ethnic background, age, or membership in a minority or sibling group, or
the presence of factors such as medical conditions or physical, mental, or emotional
handicaps) because of which it is reasonable to conclude that such child cannot be placed with
adoptive parents without providing adoption assistance, and
(C) such child is a citizen or resident of the United States (as defined in section 217(h)(3)).
(e) Special rules for foreign adoptions. --In the case of an adoption of a child who is not a
citizen or resident of the United States (as defined in section 217(h)(3))--
(1) subsection (a) shall not apply to any qualified adoption expense with respect to such
adoption unless such adoption becomes final, and
(2) any such expense which is paid or incurred before the taxable year in which such adoption
becomes final shall be taken into account under this section as if such expense were paid or
incurred during such year.
(f) Filing requirements.--
(1) Married couples must file joint returns.--Rules similar to the rules of paragraphs (2), (3),
and (4) of section 21(e) shall apply for purposes of this section.
(2) Taxpayer must include TIN.--
(A) In general.--No credit shall be allowed under this section with respect to any eligible child
unless the taxpayer includes (if known) the name, age, and TIN of such child on the return of
tax for the taxable year.
(B) Other methods.--The Secretary may, in lieu of the information referred to in subparagraph
(A), require other information meeting the purposes of subparagraph (A), including
identification of an agent assisting with the adoption.
(g) Basis adjustments.--For purposes of this subtitle, if a credit is allowed under this section
for any expenditure with respect to any property, the increase in the basis of such property
which would (but for this subsection) result from such expenditure shall be reduced by the
amount of the credit so allowed.
(h) Regulations.--The Secretary shall prescribe such regulations as may be appropriate to
carry out this section and section 137, including regulations which treat unmarried individuals
who pay or incur qualified adoption expenses with respect to the same child as 1 taxpayer for
purposes of applying the dollar limitation in subsection (b)(1) of this section and in section
137(b)(1).
These are the amendments to the old law.  The amendments as a whole take effect January 1, 2001.  However, the last section provides timelines additional timelines.
(a) IN GENERAL.--
(1) ADOPTION CREDIT.--Section 23(a)(1) (relating to allowance of credit) is amended to
This is "section (a)" of the amendments. Now, see the bottom of the page.....
read as follows:
"(1) IN GENERAL.--In the case of an individual, there shall be allowed as a credit against the
tax imposed by this chapter--
"(A) in the case of an adoption of a child other than a child with special needs, the amount of
the qualified adoption expenses paid or incurred by the taxpayer, and
"(B) in the case of an adoption of a child with special needs, $10,000.".
(2) ADOPTION ASSISTANCE PROGRAMS.--Section 137(a) (relating to adoption
assistance programs) is amended to read as follows:
"(a) IN GENERAL.--Gross income of an employee does not include amounts paid or
expenses incurred by the employer for adoption expenses in connection with the adoption of a
child by an employee if such amounts are furnished pursuant to an adoption assistance
program. The amount of the exclusion shall be--
"(1) in the case of an adoption of a child other than a child with special needs, the amount of
the qualified adoption expenses paid or incurred by the taxpayer, and
"(2) in the case of an adoption of a child with special needs, $10,000.".
(b) DOLLAR LIMITATIONS.--
(1) DOLLAR AMOUNT OF ALLOWED EXPENSES.--
(A) ADOPTION EXPENSES.--Section 23(b)(1) (relating to allowance of credit) is
amended--
(i) by striking "$5,000" and inserting "$10,000",
(ii) by striking "($6,000, in the case of a child with special needs)", and
(iii) by striking "subsection (a)" and inserting "subsection (a)(1)(A)".
(B) ADOPTION ASSISTANCE PROGRAMS.--Section 137(b)(1) (relating to dollar
limitations for adoption assistance programs) is amended--
(i) by striking "$5,000" and inserting "$10,000", and
(ii) by striking "($6,000, in the case of a child with special needs)", and
(iii) by striking "subsection (a)" and inserting "subsection (a)(1)".
(2) PHASE-OUT LIMITATION.--
(A) ADOPTION EXPENSES.--Clause (i) of section 23(b)(2)(A) (relating to income
limitation) is amended by striking "$75,000" and inserting "$150,000".
(B) ADOPTION ASSISTANCE PROGRAMS.--Section 137(b)(2)(A) (relating to income
limitation) is amended by striking "$75,000" and inserting "$150,000".
(c) YEAR CREDIT ALLOWED.--Section 23(a)(2) (relating to year credit allowed) is
amended by adding at the end the following new flush sentence:
"In the case of the adoption of a child with special needs, the credit allowed under paragraph
(1) shall be allowed for the taxable year in which the adoption becomes final.".
(d) REPEAL OF TERMINATIONS.--
(1) CHILDREN WITHOUT SPECIAL NEEDS.--Paragraph (2) of section 23(d) (relating to
definition of eligible child) is amended to read as follows:
"(2) ELIGIBLE CHILD.--The term 'eligible child' means any individual who--
"(A) has not attained age 18, or
"(B) is physically or mentally incapable of caring for himself.".
(2) ADOPTION ASSISTANCE PROGRAMS.--Section 137 (relating to adoption
assistance programs) is amended by striking subsection (f).
(e) ADJUSTMENT OF DOLLAR AND INCOME LIMITATIONS FOR INFLATION.--
(1) ADOPTION CREDIT.--Section 23 (relating to adoption expenses) is amended by
redesignating subsection (h) as subsection (i) and by inserting after subsection (g) the following
new subsection:
"(h) ADJUSTMENTS FOR INFLATION.--In the case of a taxable year beginning after
December 31, 2002, each of the dollar amounts in subsection (a)(1)(B) and paragraphs (1)
and (2)(A)(i) of subsection (b) shall be increased by an amount equal to--
"(1) such dollar amount, multiplied by
"(2) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in
which the taxable year begins, determined by substituting 'calendar year 2001' for 'calendar
year 1992' in subparagraph (B) thereof.".
(2) ADOPTION ASSISTANCE PROGRAMS.--Section 137 (relating to adoption
assistance programs), as amended by subsection (d), is amended by adding at the end the
following new subsection:
"(f) ADJUSTMENTS FOR INFLATION.--In the case of a taxable year beginning after
December 31, 2002, each of the dollar amounts in subsection (a)(2) and paragraphs (1) and
(2)(A) of subsection (b) shall be increased by an amount equal to--
"(1) such dollar amount, multiplied by
"(2) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in
which the taxable year begins, determined by substituting 'calendar year 2001' for 'calendar
year 1992' in subparagraph (B) thereof.".
(f) CREDIT ALLOWED AGAINST ALTERNATIVE MINIMUM TAX.--
(1) IN GENERAL.--Subsection (b) of section 23 is amended by adding at the end the
following new paragraph:
"(4) LIMITATION BASED ON AMOUNT OF TAX.--The credit allowed under subsection
(a) for any taxable year shall not exceed the excess of--
"(A) the sum of the regular tax liability (as defined in section 26(b)) plus the tax imposed by
section 55, over
"(B) the sum of the credits allowable under this subpart (other than this section) and section 27
for the taxable year.".
(2) CONFORMING AMENDMENTS.--
(A) Section 23(c), as amended by section 201(b), is amended--
(i) by striking "section 26(a)" and inserting "subsection (b)(4)", and
(ii) by striking "reduced by the sum of the credits allowable under this subpart (other than this
section and sections 24 and 1400C)".
(B) Section 24(b)(3)(B), as added by section 201(b), is amended by striking "this section"
and inserting "this section and section 23".
(C) Sections 26(a)(1), 904(h), and 1400C(d), as amended by section 201(b), are each
amended by striking "section 24" and inserting "sections 23 and 24".
(g) EFFECTIVE DATE.--
(1) IN GENERAL.--Except as provided in paragraph (2), the amendments made by this
section shall apply to taxable years beginning after December 31, 2001.
(2) SUBSECTION (a).--The amendments made by subsection (a) shall apply to taxable
years beginning after December 31, 2002.
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