Adoption Promotion Act of 1996

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Adoption Promotion Act of 1996''.

SEC. 2. CREDIT FOR ADOPTION EXPENSES.

    (a) In General.--Subpart A of part IV of subchapter A of chapter 1 
of the Internal Revenue Code of 1986 (relating to nonrefundable 
personal credits) is amended by inserting after section 22 the 
following new section:

``SEC. 23. ADOPTION EXPENSES.

    ``(a) Allowance of Credit.--In the case of an individual, there 
shall be allowed as a credit against the tax imposed by this chapter 
for the taxable year the amount of the qualified adoption expenses paid 
or incurred by the taxpayer with respect to the adoption of a child.
    ``(b) Limitations.--
            ``(1) Dollar limitation.--The aggregate amount of qualified 
        adoption expenses which may be taken into account under 
        subsection (a) with respect to the adoption of a child shall 
        not exceed $5,000 ($7,500, in the case of a child with special 
        needs).
            ``(2) Income limitation.--The amount allowable as a credit 
        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 allowable (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 (determined without regard to 
                sections 911, 931, and 933) exceeds $65,000, bears to
                    ``(B) $30,000.
            ``(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 allowable 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) Reimbursement.--No credit shall be allowed 
                under subsection (a) for any expense to the extent that 
                such expense is reimbursed and the reimbursement is 
                excluded from gross income under section 138.
    ``(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), 
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--
                    ``(A) reasonable and necessary adoption fees, court 
                costs, attorney fees, and other expenses--
                            ``(i) which are directly related to, and 
                        the principal purpose of which is for, the 
                        legal and finalized adoption of an eligible 
                        child by the taxpayer, and
                            ``(ii) which are not incurred in violation 
                        of State or Federal law or in carrying out any 
                        surrogate parenting arrangement, and
                    ``(B) in the case of the adoption of a child with 
                special needs, any other expenses.
            ``(2) Expenses for adoption of spouse's child not 
        eligible.--The term `qualified adoption expenses' shall not 
        include any expenses in connection with the adoption by an 
        individual of a child who is the child of such individual's 
        spouse.
            ``(3) Eligible child.--The term `eligible child' means any 
        individual who has not attained age 18 as of the time of the 
        adoption.
            ``(4) Child with special needs.--The term `child with 
        special needs' means any eligible child if--
                    ``(A) a State has determined that the child cannot 
                or should not be returned to the home of his parents, 
                and
                    ``(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.
    ``(e) 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.''.
    (b) Conforming Amendments.--The table of sections for subpart A of 
part IV of subchapter A of chapter 1 of the Internal Revenue Code of 
1986 is amended by inserting after the item relating to section 22 the 
following new item:

                              ``Sec. 23. Adoption expenses.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1995.

SEC. 3. DISTRIBUTIONS FROM CERTAIN PLANS MAY BE USED WITHOUT PENALTY TO 
              PAY ADOPTION EXPENSES.

    (a) In General.--Paragraph (2) of section 72(t) of the Internal 
Revenue Code of 1986 (relating to exceptions to 10-percent additional 
tax on early distributions from qualified retirement plans) is amended 
by adding at the end the following new subparagraph:
                    ``(D) Distributions from certain plans for adoption 
                expenses.--Distributions to an individual from an 
                individual retirement plan of so much of the qualified 
                adoption expenses (as defined in section 23(d)) of the 
                individual as does not exceed $2,000.''.
    (b) Conforming Amendment.--Subparagraph (B) of section 72(t)(2) of 
the Internal Revenue Code of 1986 is amended by striking ``or (C)'' and 
inserting ``, (C) or (D)''.
    (c) Effective Date.--The amendments made by this section shall 
apply to payments and distributions after December 31, 1995.

SEC. 4. EXCLUSION OF AMOUNTS RECEIVED UNDER EMPLOYER'S ADOPTION 
              ASSISTANCE PROGRAMS.

    (a) In General.--Part III of subchapter B of chapter 1 of the 
Internal Revenue Code of 1986 (relating to items specifically excluded 
from gross income) is amended by redesignating section 137 as section 
138 and by inserting after section 136 the following new section:

``SEC. 137. ADOPTION ASSISTANCE PROGRAMS.

    ``(a) In General.--Gross 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.
    ``(b) Limitations.--
            ``(1) Dollar limitation.--The aggregate amount excludable 
        from gross income under subsection (a) for all taxable years 
        with respect to the adoption of any single child by the 
        taxpayer shall not exceed $5,000 ($7,500, in the case of a 
        child with special needs (as defined in section 23(d)(4))).
            ``(2) Income limitation.--The 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 (determined without regard to 
                this section and sections 911, 931, and 933) exceeds 
                $75,000, bears to
                    ``(B) $40,000.
    ``(c) Adoption Assistance Program.--For purposes of this section, 
an adoption assistance program is a plan of an employer--
            ``(1) under which the employer provides employees with 
        adoption assistance, and
            ``(2) which meets requirements similar to the requirements 
        of paragraphs (2), (3), and (5) of section 127(b).
An adoption reimbursement program operated under section 1052 of title 
10, United States Code (relating to armed forces) or section 514 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 Expenses.--For purposes of this section, 
the term `qualified adoption expenses' has the meaning given such term 
by section 23(d).''.
    (b) Conforming Amendment.--The table of sections for part III of 
subchapter B of chapter 1 of the Internal Revenue Code of 1986 is 
amended by striking the item relating to section 137 and inserting the 
following:

                              ``Sec. 137. Adoption assistance programs.
                              ``Sec. 138. Cross reference to other 
                                        Acts.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1995.

Summary: Adoption Promotion Act of 1996 - Amends the Internal Revenue Code to allow an individual a tax credit of up to $5,000 for qualified adoption expenses paid or incurred during the taxable year. Provides a limitation based on modified adjusted gross income. Permits unused credit to be carried forward to the succeeding taxable year on a first-in first-out basis, but prohibits carrying forward credit to any taxable year following the fifth taxable year after the taxable year in which the credit arose. Allows distributions from an individual retirement plan to be used without penalty to pay for adoption expenses. Excludes from gross income aggregate amounts of up to $5,000 paid or expenses incurred by the employee for qualified adoption expenses in connection with the adoption of a child if such amounts are received under an employer's adoption assistance program. Provides a limitation based on modified adjusted gross income.