Adoption Assistance

You can exclude payments or reimbursements you make under an adoption assistance program for an employee's qualified adoption expenses of up to $10,000 per qualifying child from the employee's wages subject to federal income tax withholding. However, you cannot exclude these payments from wages subject to social security, Medicare, and federal unemployment taxes. For more information, see Publication 968, Tax Benefits for Adoption.

Beginning in 2002, you may exclude $10,000 from an employee's wages for the adoption of a child with special needs regardless of whether the employee has qualified adoption expenses. The determination that an adopted child is qualified as a child with special needs must be made by the employee's state.

Employee. For this exclusion, do not treat a 2% shareholder of an S corporation as an employee of the corporation. A 2% shareholder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power.

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