| Publication 968 |
2003 Tax Year |
Publication 968
Introductory Material
This is archived information that pertains only to the 2003 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
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.
Comments and suggestions.
We welcome your comments about this publication and your suggestions for future editions.
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Internal Revenue Service
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Washington, DC 20224
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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.
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.
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 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, 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 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 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 $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 |
|
will
not affect your credit or exclusion.
|
| $152,391 to $192,389 |
|
will reduce your credit or exclusion. |
| $192,390 or more |
|
will eliminate your credit or exclusion. |
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.
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.
For purposes of the exclusion, your modified AGI also includes the student loan interest deduction, the tuition and fees deduction,
and the
payments from your employer's adoption assistance program. Use the worksheet in the Form 8839 instructions to figure your
modified AGI for purposes of
the exclusion.
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.
-
Credit for child and dependent care expenses.
-
Credit for the elderly or the disabled.
-
Education credits.
-
Retirement savings contributions credit.
-
Child tax credit.
-
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.
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
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.
| IF you pay qualifying expenses in... |
|
THEN take the credit in...
|
| any year before the year the adoption becomes final |
|
the year
after the year of the payment.
|
| the year the adoption becomes final |
|
the year the adoption becomes final. |
| any year after the year the adoption becomes final |
|
the year of the payment. |
| IF your employer pays for qualifying expenses under an adoption assistance program in... |
|
THEN take the exclusion in...
|
| any year |
|
the year of the payment. |
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. |
| the year the adoption becomes final |
|
the year the adoption becomes final. |
| any year after the year the adoption becomes final |
|
the year of the payment. |
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. |
| the year the adoption becomes final |
|
the year the adoption becomes final. |
| any year after the year the adoption becomes final |
|
the year of the payment. |
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 W–4 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.
-
IR-3 visa. The adoption of a child who enters the United States on an IR-3 visa is treated as final in the year the competent
authority enters a decree of adoption. The competent authority is the court or other governmental agency of the foreign country
that has jurisdiction
and authority to make decisions in matters of child welfare, including adoption.
-
Other IR visas. The adoption of a child who enters the United States on an IR visa other than an IR-3 visa, is treated as final
in the year in which a court of the state in which the child and parents reside enters a decree of adoption, re-adoption,
or otherwise recognizes the
adoption decree of the foreign country.
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.
Married persons.
If you are married, you must file a joint return to take the adoption credit or exclusion.
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.
-
You lived apart from your spouse for the last six months of the tax year.
-
Your home is the eligible child's home for more than half the year.
-
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 in time to file your return. 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.
Special Rule for Adopting
a Child With Special Needs
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.
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
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. 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.
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