Frequently Asked Questions
Who is eligible for the Special Needs Adoption Flat Exclusion?
The adoption must be of a child with special needs as defined by the state and must become final during the taxable year.
How does the Special Needs Adoption Flat Exclusion work?
In the case of a special needs adoption, the full statutory maximum exclusion is available to the employee even if actual expenses were lower than that amount.
What law authorizes the Special Needs Adoption Flat Exclusion?
The Special Needs Adoption Flat Exclusion is authorized under IRC §137(a)(2) of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §137
Source: Internal Revenue Code, Title 26, United States Code
§ 137. Adoption assistance programs(a) Exclusion(1) In generalGross income of an employee does not include amounts paid or expenses incurred by the employer for qualified adoption expenses in connection with the adoption of a child by an employee if such amounts are furnished pursuant to an adoption assistance program.
(2) $10,000 exclusion for adoption of child with special needs regardless of expensesIn the case of an adoption of a child with special needs which becomes final during a taxable year, the qualified adoption expenses with respect to such adoption for such year shall be increased by an amount equal to the excess (if any) of $10,000 over the actual aggregate qualified adoption expenses with respect to such adoption during such taxable year and all prior taxable years.
(b) Limitations(1) Dollar limitationThe aggregate of the amounts paid or expenses incurred 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 $10,000.
(2) Income limitationThe amount excludable from gross income under subsection (a) for any taxable year shall be reduced (but not below zero) by an amount which bears the same ratio to the amount so excludable (determined without regard to this paragraph but with regard to paragraph (1)) as—(A) the amount (if any) by which the taxpayer’s adjusted gross income exceeds $150,000, bears to
(B) $40,000.
(3) Determination of adjusted gross incomeFor purposes of paragraph (2), adjusted gross income shall be determined—(A) without regard to this section and sections 85(c) 11 So in original. Probably should be followed by a comma. 221, 911, 931, and 933, and
(B) after the application of sections 86, 135, 219, and 469.
(c) Adoption assistance programFor purposes of this section, an adoption assistance program is a separate written plan of an employer for the exclusive benefit of such employer’s employees—(1) under which the employer provides such employees with adoption assistance, and
(2) which meets requirements similar to the requirements of paragraphs (2), (3), (5), and (6) of section 127(b).
An adoption reimbursement program operated under section 1052 of title 10, United States Code (relating to armed forces) or section 541 22 See References in Text note below. of title 14, United States Code (relating to members of the Coast Guard) shall be treated as an adoption assistance program for purposes of this section.
(d) Qualified adoption expensesFor purposes of this section, the term “qualified adoption expenses” has the meaning given such term by section 23(d) (determined without regard to reimbursements under this section).
(e) Certain rules to applyRules similar to the rules of subsections (e), (f), and (g) of section 23 shall apply for purposes of this section.
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