Publication 968 |
2001 Tax Year |
For Adoptive Parents
You may be able to take a tax credit of up to $5,000 for qualifying
expenses paid to adopt an eligible child. The credit can be as much as
$6,000 if the expenses are for the adoption of a child with special
needs. The adoption credit is an amount that you subtract from your
tax liability. For adoption expenses paid after 2001, the adoption
credit applies only to an adoption of a child with special needs and
does not apply to an adoption of a foreign child.
Also, up to $5,000 ($6,000 for a child with special needs) 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. After 2001, employer adoption
assistance is no longer excludable.
You may claim both a credit and an exclusion for expenses of
adopting an eligible child. For example, for an eligible child who is
not a child with special needs, you may be able to claim a credit of
up to $5,000 and also exclude up to $5,000 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.
Nonqualifying expenses.
Qualifying adoption expenses do not include expenses:
- That violate state or federal law,
- For carrying out any surrogate parenting arrangement,
- For the adoption of your spouse's child,
- Paid using funds received from any federal, state, or local
program,
- Allowed as a credit or deduction under any other federal
income tax rule, or
- Paid or reimbursed by your employer or otherwise (except
that amounts paid or reimbursed under an adoption assistance program
may be qualifying expenses for the exclusion).
Eligible child.
An eligible child must be:
- Under 18 years old, or
- Physically or mentally incapable of caring for himself or
herself.
For adoption expenses paid after 2001, the adoption credit
applies only if the eligible child is a child with special needs.
Child with special needs.
An eligible child is a child with special needs if he or she is a
citizen or resident of the United States (including the District of
Columbia and U.S. possessions) and a state determines that the child
cannot or should not be returned to his or her parents' home and
probably will not be adopted unless adoption assistance is provided to
the adoptive parents. A foreign child cannot be treated as a child
with special needs. Factors used by states to determine if a child has
special needs could include:
- The child's ethnic background,
- The child's age,
- Whether the child is a member of a minority or sibling
group, or
- Whether the child has a medical condition or physical,
mental, or emotional handicap.
If your state has determined that the child you are adopting is
a child with special needs, you should keep evidence of that fact for
your records.
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.
How the exclusion limits affect your return.
Because of the dollar limit and the income limit, all or part of
your employer's adoption assistance payments may not qualify for the
adoption exclusion. On your tax return, you must include in your
income any payments that do not qualify for the exclusion.
All of the adoption assistance payments will be shown in box 12 of
your Form W-2 (box 13 of a Form W-2 for 2000 or earlier),
identified with the letter "T." None of the payments will be
included with your taxable wages in box 1 of your Form W-2.
Therefore, if all of the payments qualify for the adoption 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 make an adjustment on your return to
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 W-4 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
$5,000 for each effort to adopt an eligible child or $6,000 for each
effort to adopt an eligible child with special needs. If you can take
both a credit and an exclusion, this dollar limit applies separately
to each. If you and another person adopt a child and both claim the
credit or exclusion, this dollar limit applies to your combined credit
or exclusion amounts.
The $5,000 (or $6,000) amount is the maximum amount of qualifying
expenses taken into account over all taxable 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.
You are adopting an eligible child who is not a child with special
needs. Your qualifying adoption expenses for the credit, before you
apply the dollar limit, are $1,000 for 2000 and $6,000 for 2001. The
maximum amount of expenses you can take into account for the total
adoption effort is $5,000. If you take the $1,000 into account for
2000, the maximum amount of expenses you can take into account for
2001 must be reduced by the expenses you took into account for 2000.
Therefore, your maximum credit for 2001 is $4,000 ($5,000 -
$1,000).
Example 2.
You adopt two brothers, Bobby and Sam, neither of whom is a child
with special needs. Your qualifying adoption expenses for the credit,
before you apply the dollar limit, are $7,500 for Bobby and $7,500 for
Sam. Under the dollar limit, the maximum amount of expenses you can
take into account for both adoptions is $10,000 ($5,000 for each
child).
Example 3.
You pay $3,000 of qualifying adoption expenses in an effort to
adopt an eligible child. However, the adoption is not successful. You
then pay an additional $4,000 of qualifying adoption expenses for the
successful adoption of a different eligible child. For the dollar
limit on the credit, you must treat the $7,000 of expenses as paid in
one adoption effort. The maximum amount of expenses you can take into
account is $5,000 ($6,000 if the child is a child with special needs).
Income Limit
The income limit on the adoption credit or exclusion is based on
modified adjusted gross income (modified AGI). Use the
following table to see if the income limit will affect your credit or
exclusion.
Table
Example 1.
You are adopting an eligible child who is not a child with special
needs. You take into account, after applying the dollar limit, $1,000
of qualifying expenses for 2000 and $4,000 for 2001. Your modified AGI
for 2000 is $85,000, and your modified AGI for 2001 is $95,000. Under
the income limit, your credit for both years is reduced ratably. You
use Form 8839 to find the amount of the reduction. Your 2000 credit is
reduced by 25%, to $750. Your 2001 credit is reduced by 50%, to
$2,000. You cannot take any further credit for this adoption effort.
Example 2.
The facts are the same as in Example 1, except that your
modified AGI for both years is $115,000. You cannot take any credit
for the adoption expenses.
Modified AGI.
To figure your modified AGI for the purpose of the credit and
exclusion, add back the following items to your adjusted gross income.
- The foreign earned income exclusion.
- The foreign housing exclusion or deduction.
- The exclusion for income from Guam, American Samoa, Northern
Mariana Islands, or Puerto Rico.
Your modified AGI for purposes of the exclusion also includes
the payments from your employer's adoption assistance program.
Tax Liability Limit
The amount of your allowable adoption credit for a year cannot be
more than the total of your regular tax and alternative minimum tax
(AMT) for that year, minus the following amounts.
- Any foreign tax credit.
- Any credit for child and dependent care expenses.
- Any credit for the elderly or the disabled.
- Any education credits.
- Any child tax credit.
- Any mortgage interest credit.
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.
After 2001, the amount of your allowable adoption credit for a year
cannot be more than your regular tax for that year reduced by your
tentative minimum tax (determined without regard to the AMT foreign
tax credit), minus the amounts listed in (2) through (6).
When To Take the
Credit or Exclusion
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.
Child who is a U.S. citizen or resident.
If the eligible child is a U.S. citizen or resident, you can take
the adoption credit or exclusion even if the adoption never becomes
final. Take the credit or exclusion as shown in the following tables.
Table
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.
Table
If your employer makes adoption assistance payments in a year
before the adoption of a foreign child is final, you must make an
adjustment on your tax return for the earlier year to include the
payments in your income. Then, on your return for the year the
adoption becomes final (provided the adoption becomes final before
2002), 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 W-4 to adjust your withholding, or make
estimated tax payments, to avoid a penalty for underpayment of
estimated tax.
How To Take the
Credit or Exclusion
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.
Joint return required.
If you are married, you must file a joint return to take the
adoption credit or exclusion. However, you can take the credit or
exclusion on a separate return if you are legally separated under a
decree of divorce or separate maintenance, or if you lived apart from
your spouse for the last six months of the tax year and:
- Your home is the eligible child's home for more than half
the year, and
- You pay more than half the cost of keeping up your home for
the year.
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.
- A social security number (SSN) if the child has one or you
will be able to obtain one in time to file your tax return. Apply for
an SSN on Form SS-5.
- An individual taxpayer identification number (ITIN) if the
child is a resident or nonresident alien and not eligible for an SSN.
Apply for an ITIN on Form W-7.
- An adoption taxpayer identification number (ATIN) if you are
in the process of adopting a child who is a U.S. citizen or resident
and cannot get an SSN for the child until the adoption is final. Apply
for an ATIN on Form W-7A.
If you are not sure whether the child is eligible for a social
security number, contact your local Social Security Administration
office or call 1-800-772-1213. If you
need information about Form W-7 or Form W-7A, contact your
local IRS office or call 1-800-829-1040.
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