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taxes paid on the distribution by filing an amended return.
Conditions
To claim the adoption credit or exclusion, 2 key conditions apply:
1 You must pay qualified adoption expenses.
2 Your modified adjusted gross income cannot exceed a set amount.
There is an additional condition for married persons; they must file jointly unless they are legally separated or live apart for the last 6 months of the year. This requirement applies even if only one spouse is adopting a child.
The determination of whether a child is a special needs child must be made by the state; a taxpayer cannot make this call on his or her own.
QUALIFIED ADOPTION EXPENSES
Qualified expenses include any reasonable and necessary expenses related to the adoption.
EXAMPLES OF QUALIFIED ADOPTION EXPENSES
Adoption agency fees
Attorney's fees
Court costs
Travel expenses while away from home (including meals and lodging)
Nonqualifying expenses include those related to your adoption of your spouse's child, expenses related to a surrogate parenting arrangement, expenses paid for adopting your spouse's child, expenses paid using funds received from a government program, and expenses that violate the law.
MODIFIED ADJUSTED GROSS INCOME LIMIT
To be eligible for the full credit or the exclusion, your modified adjusted gross income (MAGI) in 2021 cannot exceed the amount listed in Table 1.6.
Example
You adopt a child in 2021 and your MAGI is $266,660. You can only claim a credit of up to $7,200 (assuming the child is not a special needs child); half of the credit limit is phased out because of your MAGI.
Modified adjusted gross income for this purpose is AGI increased by the foreign earned income exclusion; the foreign housing exclusion or deduction; and the exclusion for income from Guam, American Samoa, Northern Mariana Islands, or Puerto Rico.
TABLE 1.6 MAGI Phaseout Range for the Adoption Credit in 2021
| Credit Amount | MAGI |
|---|---|
| Full credit | Not more than $216,660 |
| Partial credit | Over $216,660 but under $256,660 |
| No credit | $256,660 or more |
Planning Tips
The amount of the adoption credit cannot be more than your tax liability for the year. Tax liability for this purpose means your regular tax, plus your tentative alternative minimum tax (without regard to the foreign tax credit), dependent care credit, credit for the elderly or disabled, either education credit, child tax credit, or mortgage interest credit if any.
However, if the credit exceeds your tax liability, you can carry the excess credit forward for up to 5 years beyond the year in which the credit arose.
If your employer has an adoption assistance program but you aren't entitled to some or all of the exclusion (e.g., your MAGI is too high or your expenses exceeded the dollar limit), plan to pay tax on the amount your employer pays or reimburses you. The employer is not required to withhold income tax on these payments. Employer‐paid expenses are reported on your Form W‐2.
There are no income limits for using the penalty waiver for distributions from qualified retirement plans to pay adoption expenses.
Obtain a taxpayer identification number for the child if he/she does not have one. Use Form W‐7A, Application for Taxpayer Identification Number For Pending Adoption, to obtain a temporary tax ID for a child in a domestic adoption who does not have or is unable to obtain his or her own Social Security number.
Pitfall
The year for which you are entitled to claim the credit depends on the type of child you are adopting.
CHILD WHO IS A U.S. CITIZEN OR RESIDENT
If you adopt or are adopting a child who is a U.S. citizen or resident, use Table 1.7 to see the year for which to claim the credit for payments you make.
FOREIGN CHILD
You can take the credit only if the adoption becomes final. Use Table 1.8 to see the year in which to claim the credit.
TABLE 1.7 Year to Claim the Credit for Adoption of a U.S. Citizen or Resident Child
| When You Pay Expenses | When You Claim Credit |
|---|---|
| Any year before year the adoption becomes final (or falls through) | Year after year of payment |
| Year adoption becomes final (or falls through) | Year adoption becomes final |
| (or falls through) | |
| Any year after year adoption becomes final (or falls through) | Year of payment |
TABLE 1.8 Year to Claim the Credit for Adoption of a Foreign Child
| When You Pay Expenses | When You Claim Credit |
|---|---|
| Any year before year adoption becomes final | Year adoption becomes final |
| Year adoption becomes final | Year adoption becomes final |
| Any year after year adoption becomes final | Year of payment |
Where to Claim the Adoption Credit, Exclusion, or Penalty Waiver
You figure the adoption credit on Form 8839, Qualified Adoption Expenses, which is attached to your return. The amount of the credit is entered on Schedule 3 of Form 1040 or 1040‐SR.
To claim the credit, you must retain certain documents; they do not have to be attached to the return.
For U.S. adoptions, attach a copy of the adoption order or decree.
For adoptions finalized abroad, include the child's Hague Adoption Certificate, an IH‐3 visa, or a foreign adoption decree translated into English. If the child's country of origin is not a party to the Hague Convention, then attach a copy of the translated decree or an IR‐2 or IR‐3 visa.
If you adopt a special needs child, also attach the state determination of the child's special needs status certificate so you can claim the full $14,440, regardless of the adoption costs you paid.
Example