Questions on U. S. Federal Adoption Credit2003 IRS Publication 968 - Introductory Material Table of Contents Important Change for 2003 Dollar limit increased. Beginning in 2003, the maximum credit increases to $10,160. Also, the exclusion from income of benefits under your employer's adoption assistance program increases to $10,160. You will be allowed these amounts for the adoption of a child with special needs regardless of whether you have qualifying expenses. See Child with special needs, for more information. Introduction This publication explains two tax benefits available to offset the expenses of adopting a child. The benefits are the adoption credit and the exclusion from income of benefits under your employer's adoption assistance program. The first part of the publication
is for persons who have recently adopted a child, are in the
process of adopting a child, or are considering adopting a child.
The second part is for employers who provide adoption assistance
payments to workers. You can e-mail us at *taxforms@irs.gov. Please put "Publications Comment" on the subject line. You can write to us at the following address:
Internal Revenue Service We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. For Adoptive Parents You may be able to take a tax credit of up to $10,160 for qualifying expenses paid to adopt an eligible child. The adoption credit is an amount that you subtract from your tax liability. Also, up to $10,160 paid or reimbursed by your employer for qualifying adoption expenses under an adoption assistance program may be excludable from your gross income. (However, you cannot exclude this adoption assistance if your employer is an S corporation in which you own more than 2% of the stock or stock with more than 2% of the voting power.) An adoption assistance program for this purpose is a separate written plan set up by an employer to provide adoption assistance to its employees. See Adoption assistance program under For Employers, later, for more information. You may claim both a credit and an exclusion for expenses of adopting an eligible child. For example, you may be able to claim a credit of up to $10,160 and also exclude up to $10,160 from your income. However, you cannot claim both a credit and an exclusion for the same expense. Qualifying Expenses Qualifying adoption expenses
are reasonable and necessary adoption fees, court costs, attorney
fees, traveling expenses (including amounts spent for meals and
lodging) while away from home, and other expenses directly related
to, and whose principal purpose is for, the legal adoption of
an eligible child. Eligible child. An eligible child must be: Limits on the Credit or Exclusion The credit and the exclusion
for qualifying adoption expenses are each subject to a dollar
limit and an income limit. These limits apply separately. The
credit is also subject to a limit based on your tax liability.
Figure these limits on Form 8839, Qualified Adoption Expenses.
All of the adoption assistance payments will be shown in box 12 of your Form W2, identified with the letter "T." None of the payments will be included with your taxable wages in box 1 of your Form W2. Therefore, if all of the payments qualify for the exclusion, you will not need to adjust the amount of wages and other income you report on your tax return. But if any of the payments do not qualify for the exclusion, you must include in your income the payments that do not qualify. See Form 8839 and its instructions.
Your employer is not required to withhold income tax on payments for qualifying expenses under an adoption assistance program. If you must include any of the payments in your income, your withholding may not be enough to cover the tax on those payments. Therefore, you may need to give your employer a new Form W4 to adjust your withholding, or make estimated tax payments, to avoid a penalty for underpayment of estimated tax. Dollar Limit The amount of your adoption credit or exclusion is limited to $10,160 for each effort to adopt an eligible child. For this purpose, an attempt that leads to the successful adoption of a child and any unsuccessful attempt to adopt a different child are treated as one effort. If you can take both a credit and an exclusion, the dollar limit applies separately to each. If you and another person adopt a child and both claim the credit or exclusion, the dollar limit applies to your combined credit or exclusion amounts. The $10,160 amount is the maximum amount of qualifying expenses taken into account over all tax years. Therefore, it must be reduced by the amount of qualifying expenses taken into account in previous years for the same adoption effort. Example 1. In 2003, you adopt two brothers, Bobby and Sam. Your qualifying adoption expenses paid in 2003 are $7,500 for Bobby and $7,500 for Sam. When you figure the credit, you can take all the expenses into account for both adoptions because they do not exceed the dollar limit of $20,320 ($10,160 for each child). Example 2. You pay $3,000 of qualifying adoption expenses in an effort to adopt an eligible child in 2003. However, the adoption is not successful. Later in the year, you pay an additional $9,000 of qualifying adoption expenses for the successful adoption of a different eligible child. Under your employer's adoption assistance program, you are reimbursed for these expenses in 2003. For the dollar limit, you must treat the $12,000 as paid in one adoption effort. Your exclusion from income is limited to $10,160. You must include the remaining $1,840 in your income. Income Limit The income limit on the adoption credit or exclusion is based on modified adjusted gross income (modified AGI). For 2003, use the following table to see if the income limit will affect your credit or exclusion. IF your modified AGI is... THEN the income limit... $152,390 or less $152,391 to $192,389 $192,390 or more Example. In 2003, you adopt an eligible
child. Your qualifying adoption expenses are $12,000 and your
modified AGI is $172,390. After you apply the dollar limit ($10,160),
you apply the income limit. You use Form 8839 to figure your
credit. The income limit reduces your credit by 50%. Your adoption
credit is $5,080. Tax Liability Limit The amount of your allowable
adoption credit for a year cannot be more than the total of your
regular tax (after reduction by any foreign tax credit) and alternative
minimum tax (AMT) for that year, minus the following amounts. If your credit is more than this limit, you can carry forward the unused credit to your next 5 tax years, or until used, whichever comes first. Use the worksheet in the Form 8839 instructions to figure your credit carryforward.
The income limit, discussed earlier, does not apply to a credit carried forward. When To Take the When you can take the adoption
credit or exclusion depends on whether the eligible child is
a citizen or resident of the United States (including U.S. possessions)
at the time the adoption effort begins.
IF you pay qualifying expenses
in... THEN take the credit in... any year before the year the
adoption becomes final the year the adoption becomes
final any year after the year the adoption
becomes final IF your employer pays for qualifying
expenses under an adoption assistance program in...
THEN take the exclusion in... any year Foreign child. If the eligible child is not a U.S. citizen or resident, you cannot take the adoption credit or exclusion unless the adoption becomes final. Take the credit or exclusion as shown in the following tables.
IF you pay qualifying expenses
in... THEN take the credit in... any year before the year the
adoption becomes final the year the adoption becomes
final any year after the year the adoption
becomes final Note. For the credit, the amount of expenses paid or incurred before 2002 that can be taken into account is limited to the pre-2002 dollar limits. The limit on these expenses is $5,000 ($6,000 in the case of a child with special needs). IF your employer pays for qualifying
expenses under an adoption assistance program in...
THEN take the exclusion in... any year before the year the
adoption becomes final the year the adoption becomes
final any year after the year the adoption
becomes final If your employer makes adoption assistance payments in a year before the adoption of a foreign child is final, you must include the payments in your income in the year of payment. Then, on your return for the year the adoption becomes final, you can make an adjustment to take the exclusion. See Form 8839 and its instructions.
Your employer is not required to withhold income tax on payments for qualifying expenses under an adoption assistance program. If you must include the payments in income in the year paid because your adoption of a foreign child is not final, your withholding may not be enough to cover the tax on those payments. You may need to give your employer a new Form W4 to adjust your withholding, or make estimated tax payments, to avoid a penalty for underpayment of estimated tax. When adoption is final.
When
the adoption becomes final depends on the type of immediate relative
(IR) visa under which the child enters the United States. How To Take the You must file Form 8839 with
either Form 1040 or Form 1040A to take the credit or exclusion.
You should maintain records to support any adoption credit or
exclusion claimed. However, you are not considered married if you are legally separated under a decree of divorce or separate maintenance. In that case, you can take the credit or exclusion on a separate return. Married and living apart.
You can
also take the credit or exclusion on a separate return if all
of the following statements are true. Child's identifying number. You must provide an identifying
number for the child on line 1, column (f), of Form 8839. Use
whichever of the following numbers is appropriate. If you are not sure whether the child is eligible for a social security number, contact your local Social Security Administration office or call 18007721213. If you need information about Form W7 or Form W7A, contact your local IRS office or call 18008291040. Special Rule for Adopting
Beginning in 2003, the
maximum credit and exclusion, subject to the income and tax liability
limits discussed earlier, will be allowed for the adoption of
a child with special needs even if you do not have any qualifying
expenses. For 2003, the maximum amount for each is $10,160. IRS Federal Tax Publication web site : http://www.irs.gov/publications/ Information updated January 2003 |