The Adoption Tax Credit Will Continue

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Happy New Year!! We are happy to announce that the Adoption Tax Credit will be made permanent by the American Taxpayer Relief Act which was just passed in the House of Representatives. This is a huge victory for children in need of permanent families and those families wanting/hoping to adopt. The Adoption Tax Credit will continue to provide some financial assistance to offset adoption expenses, making it possible for more children to find their forever families.

Please consult your tax professional, however our current understanding is:  

Unfortunately this did not make the adoption credit refundable, so it will only benefit those adoptive families who have federal income tax liability. The credit will begin to phase out for families with modified adjusted gross incomes above a certain level (around $190,000) and the credit will go away completely for those with incomes around $230,000. (Exact numbers for the maximum credit and income guidelines have yet to be releaesed.)

For 2013 and beyond, the credit will remain flat for special needs adoptions, meaning that those who adopt children from the U.S. who receive adoption assistance/adoption subsidy benefits can claim the maximum credit regardless of their expenses. For other adoptions (except for step-parent adoptions), parents can claim the credit based on their qualified adoption expenses.

Even though the credit isn’t refundable for 2012, we encourage those who adopted in 2012 to submit a Form 8839 with their 2012 taxes even if they do not have tax liability. Although they will not receive an adoption credit refund with their 2012 taxes, the credit can be carried forward up to five additional years. Families might benefit later if either their tax situation changes or the credit is made refundable in the future, and then wouldn’t have to amend their 2012 taxes.

To be eligible for the adoption credit, you must:

  • Adopt an eligible child.
  • Pay qualified adoption expenses out of your own pocket.
  • Adoption expenses include any and all costs related to, & necessary for, your adoption
  • Expenses may include agency fees, legal fees, court costs and travel costs.
  • Claim it appropriately:  The year you can claim the adoption credit depends on when the
    adoption was finalized and whether the adopted child is a US Citizen. For expenses
    paid before the adoption is final, you take the adoption credit in the year after your
    expenses were paid.  For expenses paid in the same year that the adoption is final, you
    take the adoption credit the same year.  For expenses paid in the year after the adoption is final,
    you take the credit in the year the expenses were paid.
  • If your adopted child does not yet have a Social Security Number, you must apply for
    an Adoption Tax ID Number (ATIN) in order to begin claiming your adopted child as a
    dependent.  The IRS provides information about ATIN’s HERE.

The adoption credit is calculated on Form 8839 Qualified Adoption Expenses (PDF).

Adoption Tax Credit Amounts for 2013:

From our interpretation, the credit in 2013 will be slightly up from the 2012 level of $12,650 (roughly more than 2012, based on inflation) for qualified adoption expenses. The bill retained the provision that allows it to be “flat” for special needs, meaning special needs adoptions are excluded from needing to document qualified adoption expenses. The credit also retains the carry forward provision allowing taxpayers to apply the credit toward tax liability over a period of 5 years forward.

As we understand it, the credit includes a permanent Cost of Living Adjustment (indexed for inflation). The actual 2013 figures (including the maximum credit level and the income phase out limitations) will need to be issued by the IRS sometime this year. This could come out from IRS quite a bit later as they are not immediately relevant until 2013 is completed and taxpayers are filing their 2013 taxes in 2014.

Please note the bill did not affect the credit for 2012. It remains to be $12,650, non-refundable. It is applied toward tax liability for qualified expense (except for special needs adoption who do not need to document expenses) and may be carried forward over 5 years.

A source to watch for more information:

Adoption Tax Credit Is Continued.