Adoption Credit and Assistance Made Permanent

Written by: Christy Rakoczy

Adopting a child can be very expensive, but the government tries to give adoptive parents a break by allowing for tax relief for the costs associated with adoption. Unfortunately, this credit was not guaranteed in the past and thus it was at risk of being lost as democrats and republicans engaged in budget battles, fights over spending and taxes and other financial issues. In the Fiscal Cliff deal reached on January 1, 2012, however, the adoption credit was renewed for 2012 and 2013 and the credit was made permanent in the future. This gives parents a lot more certainty about their ability to take deductions for adoption costs and may help parents concerned about the financial burden to take the leap into adoption.  You can now count on the following rules applying on a permanent basis.

The Adoption Credit/Assistance Permanent Rules

There are many different costs associated with adopting a child, and the tax credit is available to cover some of the most common expenses. For example, the adoption tax credit can cover the “ordinary and necessary” costs associated with adoption. These include:

  • Fees for an adoption attorney
  • Expense for travel and meals
  • Fees for the adoption
  • Fees for court proceedings
  • Re-adoption fees if you are adopting a foreign child.
Parents are not permitted to claim a tax credit for expenses that were already reimbursed by any federal, state or local agency. Parents also cannot take the adoption tax credit when they arranged for a surrogate mother to carry their baby; when they adopt a spouses child; when they are already deducting the expense elsewhere on their tax return; or when the expense violates state or federal laws (i.e. parents cannot deduct bribes).

In 2012, families could take a maximum adoption credit of $12,650 per child while in 2013, the credit goes up to $12,360 per child. However, the available credit begins to phase out once the couple has income of $189,710 and is not available at all for those with an income of $229,710.  The adoption credit has both a credit provision that reduces your income tax liability AND an exclusion provision permitting you to deduct expenses from your reported gross income, thus reducing the amount of income you are taxed on (ergo reducing your tax bill). The income caps apply to both the exclusion provision and the tax credit provision.

In 2010 and 2011, the adoption tax credit was a refundable tax credit while in 2012 and in the future, the credit has now been established as a nonrefundable tax credit. This means that you can take the credit only as a refund from your income taxes or to reduce the tax burden you owe. If you do not pay income taxes or do not pay taxes up to the full amount of the credit, you do not get a refund on the amount of the credit.  In other words, if you were eligible for the $12,650 credit but you only paid $10,000 in taxes, you would not get a refund of the $2,650 difference but you could eliminate your income tax liability.

Parents who adopt a special needs child can take the full amount of the tax credit even if they do not incur the full amount of expenses associated with the adoption.


Adoption Credit and Assistance Made Permanent

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