The adoption tax credit was first adopted in 1997 and has been extended annually on a yearly basis. On January 2, 2013, Congress passed the 2012 American Taxpayer Relief Act and in it made the adoption tax credit PERMANENT so as not to revisit it annually. However, they did not extend the REFUNDABLE adoption credit that was available for the 2010 and 2011 years. As in the past, the credit is again NON-REFUNDABLE for 2012 and into the future unless changed by Congress. The 2012 maximum credit is $12,650 per child for qualified adoption expenses.

This all means that adoptive parents will not be eligible to recover the difference of their qualified expenses that exceed their tax liability. In doing so, Congress assumes that all taxpayers have a tax liability that can be offset. In 2010 and 2011 parents were able to have the excess refunded regardless of tax liability. For 2012 and forward any unused adoption tax credit can be carried forward for five years.

Qualified Adoption Expenses Include:

  • Reasonable and necessary adoption fees
  • Court costs
  • Attorney fees
  • Traveling expenses (including meals and lodging while away from home)
  • Other expenses that are directly related to and for the principal purpose of the legal adoption of an eligible child

An eligible child must be under 18 years old, or be physically or mentally incapable of caring for him or herself for the items above to be counted as qualified adoption expenses.

Credit Limits

The credit is limited to a specific dollar amount ($12,650 for 2012) for each effort to adopt an eligible child. The dollar limit for a particular year must be reduced by the amount of qualified adoption expenses used in the previous years for the same adoption effort. If you claimed a $4,000 credit in 2011 and paid an additional $12,650 in 2012 (when the adoption became final), your maximum credit is $8,650 for 2012 ($12,650- $4,000).

The credit is also subject to an income limitation as well as a dollar amount. The income limit on the adoption credit is based on your modified adjusted gross income (MAGI). If your MAGI is between $189,710 and $229,710, your credit will be reduced. If your MAGI are above $229,710 your credit will be eliminated. If your MAGI is below $189,710 your credit will be limited by the maximum amount allowed ($12,650 for 2012).

Generally, the credit is allowable whether the adoption is domestic or foreign. The tax years for which you can claim the credit depends on when the expenses are paid, whether the adoption is domestic or foreign and whether the adoption has been finalized. For domestic adoptions, qualified adoption expenses paid before the year the adoption becomes final are allowable for the tax year following the year of payment, even if the adoption is never finalized. For a foreign adoption, the credit is allowable only if the adoption is finalized.

Qualified adoption expenses paid before and during the year of finality of a foreign adoption are allowable for the year of finality. Once an adoption becomes final, expenses paid during or after the year of finality are allowable for the year of payment, whether the adoption is foreign or domestic.

Claiming the Adoption Tax Credit

To claim the adoption tax credit, complete and attach IRS Form 8839 to your federal tax return. The return may not be filed electronically and must be paper filed. There is no need to attach or send in receipts or documents with the paper return. It is important to keep all the documents used to calculate the adoption tax credit for your records.

An example of the documents that should be kept are: receipts for qualified adoption expenses, entry visas for foreign adoptions, final decree, certificate or order of adoption, home study by an authorized placement agency, child placement agreements or court orders, and determination of special needs status by a State or the District of Columbia.

In addition to the tax credit for qualified adoption expenses, there is income exclusion for employer-provided adoption benefits. You may qualify for the income exclusion if you adopted or attempted to adopt a child and the program paid or reimbursed you for qualified expenses relating to the adoption. Under this qualified adoption assistance program, you may exclude from your income amounts paid to you or for you by your employer. The amount of the exclusion is as much as $12,650 for 2012.

To summarize the Adoption Tax Credit for tax years beginning after December 31, 2011:

  • The adoption credit is non-refundable.
  • The maximum amount of credit is $12,650. You can reduce your 2012 tax bill by up to $12,650 per child.
  • You can carry any unused credit forward up to five tax years.
  • For 2012 returns the credit is eliminated if your modified adjusted gross income (MAGI) is more than $229,710 and it begins to phase out if your MAGI is more than $189,710.
  • The American Taxpayer Relief Act of 2012 (H.R.8) enacted on January 2, 2013 extended the adoption credit and the adoption assistance programs for tax years beginning after December 31, 2012.
  • For 2013 returns, the maximum non-refundable credit is $12,970 and is eliminated if your modified adjusted gross income (MAGI) is more than $234,580 and it begins to phase out if your MAGI is more than $194,580.
  • To claim the credit you must paper file your tax return and attach Form 8839.

E. Michael Hoffman CPA / 27110 Grand Central Pkwy. #12W Floral Park, NY 11005/ Tel: 718-225-7505 Fax: 718-225-7503

The explanation above is not all-inclusive and conclusions are based on the facts and assumptions as stated and on authorities that are subject to change. To ensure compliance with requirements imposed by the IRS in Circular 230, any tax advice contained in this article is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.

Contact Greenberg & Greenberg for assistance with adoption tax credits or other adoption needs.