IRS Definitions and Explanations, Page 3
Income Limit
The income limit on the adoption credit or exclusion is based on modified adjusted gross income (modified AGI). For 2006, 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... |
|---|---|
| $164,410 or less | will not affect your credit or exclusion. |
| $164,410 to $204,410 | will reduce your credit or exclusion. |
| $204,410 or more | will eliminate your credit or exclusion. |
Example.
In 2006, 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 ($10,960), 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 $5,195.
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 carry forward.
Caution: The income limit, discussed earlier, does not apply to a credit carried forward.
Credits: U.S. Internal Revenue Service
