26 U.S.C. § 137 — Adoption assistance programs

(a) Exclusion. (1) In general. If an employer pays or covers "qualified adoption expenses" for an employee who is adopting a child, and does it through an adoption assistance program, that money doesn't count as the employee's taxable income. (2) $10,000 exclusion for adopting a child with special needs, no matter the actual cost. If the adoption of a child with special needs becomes final in a tax year, the employee gets credit for $10,000 of qualified adoption expenses for that adoption — even if the real expenses were less. This extra credit equals $10,000 minus whatever qualified expenses were already counted for that same adoption in that year and in all earlier years. (b) Limits. (1) Dollar limit. Across every tax year combined, the total amount counted under subsection (a) for one child's adoption can't go over $10,000. (2) Income limit. The amount excluded from income under (a) shrinks — but never below zero — as the taxpayer's income rises. The shrinkage is figured as a ratio: (A) how much the taxpayer's adjusted gross income is above $150,000, divided by (B) $40,000. That ratio is applied to the amount that would otherwise be excluded. (3) How to figure adjusted gross income for that ratio. It's calculated (A) ignoring this section and sections 85(c), 221, 911, 931, and 933, and (B) after applying sections 86, 135, 219, and 469. (c) What counts as an "adoption assistance program." It's a separate written plan an employer sets up only for the benefit of its own employees, where (1) the employer gives employees help adopting, and (2) the plan meets requirements similar to those in section 127(b), paragraphs (2), (3), (5), and (6). An adoption reimbursement program run under section 1052 of title 10 (for the armed forces) or section 541 of title 14 (for the Coast Guard) is also treated as an adoption assistance program under this section. (d) "Qualified adoption expenses" means whatever section 23(d) says it means, figured without counting any reimbursements received under this section. (e) Rules similar to the rules in section 23's subsections (e), (f), and (g) apply here too. (f) Adjusting for inflation. Starting with tax years beginning after December 31, 2002, the dollar amounts in (a)(2) and in (b)(1) and (b)(2)(A) go up each year. The increase equals: (1) the dollar amount, multiplied by (2) the cost-of-living adjustment that section 1(f)(3) sets for the calendar year the tax year begins in — but using "calendar year 2001" in place of "calendar year 2016" in that formula. If the increased number isn't a multiple of $10, it gets rounded to the nearest $10.