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Adoption Tax Credit update: Now its permanent!

 

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by Tim Elder in Archives, Domestic Adoption

The adoption tax credit has helped families offset the high cost of adoption since it was first put into law in 1997. Many folks see the credit as vital to providing loving homes to as many children as possible. As great as the credit has been for children and for adoptive parents, it has never been a permanent part of our tax laws…until now.Tax form

In January 2013 Congress passed the American Taxpayer Relief Act of 2012, which made the adoption tax credit permanent.

For 2013 the maximum adoption tax credit is $12,970.

Before I go any further, let me say that I am not a tax professional.  Due to the complexity of the adoption tax credit, I personally use and recommend having a tax professional complete your return.  OK, now let’s look at what the adoption tax credit means for 2012 and 2013.

For 2012

  • How much is the credit?  The Adoption Tax Credit for 2012 is $12,650 per adopted child.
  • The credit is nonrefundable, meaning the credit an adoptive parent will receive depends on their federal income tax liability. The credit can be “carried over” for up to 5 additional years (see examples of this below for more information.)
  • What are the income limits for the credit?  Families with an income below $189,710 can claim full credit. Those that make between $189,710 and $229,710 can claim partial credit, and those that make over $229,710 cannot claim the credit.
  • What are the expenses that can be claimed? Families get the credit based on their qualified adoption expenses. These are the “reasonable and necessary expenses” that you have paid to complete the adoption, such as: Adoption fees (paid to an agency or attorney), court costs, and travel expenses. Check out this IRS page for more about expenses. If your expenses are less than $12,650, you can only claim the amount of the expenses. If they are more than $12,650, you can only claim the maximum of $12,650.
  • When can you claim it? Families who adopt internationally cannot claim the credit until the year of finalization. If you are adopting from the U.S. you can claim the credit the year of finalization OR the year after you had adoption expenses. This is a very important point, so I have an example for you:  A family starts the domestic adoption process in 2010 and has $5,000 in expenses in 2010, $5,000 in 2011, and $2,000 in 2012. They are able to finalize the adoption in 2012. They can claim the $5,000 spent in 2010 on their 2011 taxes. They will have to wait to claim the $5,000 and $2,000 on their 2012 taxes.

For 2013

  • How much is the credit?  The Adoption Tax Credit for 2013 is $12,970 per adopted child.
  • The credit remains nonrefundable, meaning the credit an adoptive parent will receive depends on their federal income tax liability. The credit can be “carried over” for up to 5 additional years.
  • What are the income limits for the credit?  Families with an income below $194,580 can claim the full credit. Those that make between $194,580 and $234,580 can claim partial credit, and those that make over $234,580 cannot claim the credit.
  • What are the expenses that can be claimed?  The qualified adoption expenses have the same rules that applied in 2012.
  • When can you claim it?  The rules for 2013 are the same as in 2012 – no changes. Families who adopt internationally cannot claim the credit until the year of finalization. If you are adopting from the U.S. you can claim the credit the year of finalization or the year after you had adoption expenses.

What does “nonrefundable” mean?

A nonrefundable credit means the adoptive family will get the adoption tax credit based on what their federal income tax liability is for 2012 (and the next five years). Families can use as much of the credit as they have federal income tax liability, which is the amount of federal tax you owe as shown on line 46 of the Form 1040. Even if you normally get a refund, you may still have tax liability and can get a larger refund with the adoption tax credit. You have a total of 6 years to claim the credit (starting with the year you first claimed the credit plus five additional years.)

Want to read more about the Adoption Tax Credit?  Here are some resources:

IRS.gov Adoption Tax Credit  

NACAC (North American Council on Adoptable Children)

Adoptiontaxcredit.org  Be sure to check out their Frequently Asked Questions page.

My previous posts: Adoption-tax-credit-2011-2012 and Will the adoption tax credit go away after 2012? 

Questions:  What does the Adoption Tax Credit mean for you?  What is your question about the credit? 

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