More details: The adoption tax credit covers the reasonable and necessary expenses related to the legal adoption of a child who is under age 18 or is physically or mentally incapable of self-care. This includes adoption agency fees, court costs, attorneys’ fees, travel costs (including meals and lodging), and additional adoption expenses for foreign children.

However, illegal fees and surrogate parenting fees are not eligible. Also, you cannot claim the credit for government reimbursements or payments made under an employer-sponsored plan.

How much is the adoption tax credit? It is adjusted annually for inflation. For the 2007 tax year, the credit is equal to the actual amount of qualified adoption expenses up to $11,390. If a child with special needs is adopted, the maximum credit amount is allowed, regardless of the actual adoption expenses.

Note, however, that the maximum credit is phased out for certain high-income taxpayers. For the 2007 tax year, the phaseout occurs between $170,820 and $210,820 of adjusted gross income (AGI). No credit is available above the upper limit.

When do you claim the credit? Generally, it is available on the tax return for the year in which qualified expenses are paid or incurred. However, if the adoption of a U.S. citizen or resident is not finalized at the end of the year, you must wait until the following year to take the credit. At this point, you may claim the credit for all qualified expenses (even if the adoption is not finalized in that year).

Caution: Slightly different rules apply to the adoption of foreign children. In brief, you cannot claim any credit until the year in which the adoption is final. All of the prior expenses are grouped together for that year.

Of course, the parent of a child may be eligible for certain other tax breaks. This can include dependency exemptions, the child tax credit, the dependent care credit and medical expense deductions, just to name a few. Caution: These tax breaks may also be subject to phaseout rules based on AGI.

Final word: Obtain professional tax assistance to determine the exact amount of the adoption tax credit and related tax breaks.