Adoption Credit

Adoption Tax Benefits. Currently, taxpayers may claim a tax credit for qualified adoption expenses of up to $5,000 a child ($6,000 in the case of a special needs child). The credit is phased out ratably for taxpayers with $75,000 to $115,000 of AGI. The credit for non-special needs adoptions was set to expire after 2001. The law also allows, through 2001, an exclusion from income for employer-provided adoption assistance (the dollar limits and phaseout are the same as for the credit).

Effective for years starting after 2001, the credit is permanent for all adoptions, the maximum credit increases to $10,000 per child for all adoptions, and the phaseout starting point becomes $150,000 of AGI. The law permanently extends the income exclusion for employer-provided adoption assistance and raises the maximum exclusion amount and phaseout range to match the credit. After 2002, a credit/exclusion can be claimed for a special needs adoption regardless of whether the taxpayer actually has qualified adoption expenses.

Marriage Penalty Relief

A married couple may file a joint tax return and be treated as one taxpayer, so that taxes are paid on the couple’s total taxable income. (While a married couple may file separate returns, this usually results in higher taxes than filing jointly.) A “marriage penalty” exists when the combined tax liability of a married couple filing jointly is greater than the sum of their tax liabilities computed as though they were two unmarried filers.

The new law adds several measures to alleviate the marriage penalty, but not until 2005.

Standard Deduction Increase. The tax law allows individuals who do not itemize deductions to claim a standard deduction. The standard deduction available to single filers in 2001 is 60% of the standard deduction that can be claimed on a joint return. Thus, two unmarried persons have total standard deductions that exceed the standard deduction allowed to a married couple filing jointly.

The new law increases the basic standard deduction for joint filers to twice the basic standard deduction for an unmarried person filing a single return. The increase is phased in over five years, beginning in 2005, and is fully applicable in 2009 and later years.

Expansion of 15% Bracket. The new law increases the size of the 15% regular income-tax bracket for joint filers to twice the size of the corresponding 15% rate bracket for an unmarried person filing a single return. The increase is phased in over four years, starting in 2005.

The new law also makes adjustments to the earned income credit to provide additional marriage penalty relief for lower earners.

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Last modified: February 19, 2007