What to Expect From the Changes to Adoption Tax Credit in 2013
“The adoption tax credit, which can be claimed for eligible adoption-related expenses, has helped thousands of American families offset the high cost of adoption since the credit was established in 1997. Since 2003, families that adopted children with special needs could claim the full credit regardless of their qualified adoption expenses. The credit has made adoption a more viable option for many parents who might not otherwise have been able to afford adoption, allowing them to provide children with loving, permanent families. With more than 100,000 children in U.S. foster care available for adoption, and countless millions of orphaned and abandoned children around the world, the continuation of the adoption tax credit is vital to providing love, safety, and permanency to as many children as possible.” Source Adoptiontaxcredit.org
The adoption tax credit has a history of being one of the most confusing credits. In 2011, the credit was a refundable credit of $13,360 per child. In 2012, it decreased to $12,650 and became non-refundable—meaning that if the adopting family doesn’t have $12,650 in federal tax liability in 2012, they will not receive a refund for the unused balance of the credit, but they will be able to carry the unused balance over and apply it to tax liability for the next five years. Confusing enough for you?
In 2012 and previous years, the credit was available for most adoptions except stepparent adoptions. Families that adopt special-needs children have also been allowed to take advantage of the full amount of the credit, whether or not they actually have that much for upfront adoption expenses.
The bill to avert the fiscal cliff, which was signed on January 2, made this tax credit PERMANENT. This bill permanently extended the credit and income exclusion for employer paid or reimbursed expenses. The projected maximum amount of the credit for the year 2013 looks to be $12,720 – $12,770. The credit will remain flat for special needs adoptions regardless of the total expenses.
If you adopted a child in the past few years and didn’t claim the credit, there may still be time to file an amended return. The IRS is notorious for auditing returns claiming the adoption credit, so it’s a good idea to consult your accountant and attorney to make sure you have the right documentation to back up your return. For forms and more information on Adoption Tax Credit visit the IRS website
