Based on the number of questions we’ve received lately, there is a great deal of confusion on what will happen in the next few years to the Federal Adoption Tax Credit.  This confusion is understandable if you look at the history of how this credit was last renewed.  The Adoption Tax Credit was rescheduled to expire on December 31, 2010.  In March 2010, as part of the Patient Protection and Affordable Care Act, the Adoption Tax Credit was extended one year until Dec. 31, 2011, the amount of credit was increased, and it was made refundable.  On December 17, 2010, President Obama extended all the Bush tax cuts, which included the provisions for the Adoption Tax Credit, for two years to Dec. 31, 2012.  This extension does not apply to the changes made by the Patient Protection and Affordable Care Act; therefore, the adoption tax credit for 2012 will revert to the pre-2010 credit amount (adjusted for inflation) and will not be refundable.  After 2012, the Adoption Tax Credit will go away for non-special needs children, unless legislation is passed to extend it. For those of you filing for this credit in 2012 for your 2011 taxes, check out our Top Ten Tips for Avoiding Delays When Filing for the Adoption Tax Credit.

I want to thank Adoption Attorney Mark McDermott for breaking this down for us year by year.

How did the adoption tax credit affect parents in 2010?

  • the maximum adoption tax credit is $13,170 for qualified adoption expenses (including special needs adoptions)
  • the maximum exclusion from income for employer-provided adoption assistance is $13,170
  • the allowable credit and the income exclusion begins to phase out for taxpayers with adjusted gross income of $182,520 and is completely eliminated for taxpayers with adjusted gross income of $222,520
  • the credit is refundable, which means that a taxpayer’s qualified adoption expenses, up to the full $13,170, will be fully reimbursed by the government regardless of the taxpayer’s overall tax liability
  • in an adoption of a special needs child, taxpayers may claim the full $13,170 credit without regard to the amount of qualified adoption expenses paid or incurred and regardless of their tax liability
  • any portion of an adoption credit claimed in an earlier taxable year that a taxpayer carries forward to 2010 is allowable as a refundable tax credit in 2010
  • the IRS will require taxpayers to provide documentation substantiating claims for the adoption credit. In addition, a taxpayer claiming the adoption credit for a child with special needs must attach a copy of the state determination of special needs to the taxpayer’s income tax return

What Happens to the Adoption Tax Credit in 2011?

  • the maximum adoption tax credit is $13,360 for qualified adoption expenses (including special needs adoptions)
  • the maximum exclusion from income for employer-provided adoption assistance is $13,360
  • the allowable credit and the income exclusion begins to phase out for taxpayers with adjusted gross income of $185,210 and is completely eliminated for taxpayers with adjusted gross income of $225,210
  • the credit is refundable, which means that a taxpayer’s qualified adoption expenses, up to the full $13,360, will be fully reimbursed by the government regardless of the taxpayer’s overall tax liability
  • in an adoption of a special needs child, taxpayers may claim the full $13,360 credit without regard to the amount of qualified adoption expenses paid or incurred and regardless of their tax liability
  • any portion of an adoption credit claimed in an earlier taxable year that a taxpayer carries forward to 2011 is allowable as a refundable tax credit in 2011
  • the IRS will require taxpayers to provide documentation substantiating claims for the adoption credit. In addition, a taxpayer claiming the adoption credit for a child with special needs must attach a copy of the state determination of special needs to the taxpayer’s income tax return
  • The IRS has updated their “tips” for adoptive parents planning on claiming the adoption tax credit on their 2011 federal taxes.

What Happens to the Adoption Tax Credit in 2012?

  • after December 31, 2011, the refundability of the adoption tax credit and the increase in the maximum credit amount and income exclusion that were in effect for 2010 and 2011 will be repealed
  • the maximum credit and exclusion from income will be reduced to $12,170 (but with an adjustment for inflation since 2010)

What Happens to the Adoption Tax Credit in 2013 and Beyond?

Unless further legislation is passed, there will be no adoption tax credit in 2013 and beyond. However, the $6,000 credit for special needs children will still exist since it is a permanent part of the law and thus not subject to the sunset provision.

Creating a Family will be following the progress of various legislations to extend the adoption tax credit past 2013 and to extend the refundability past 2011.  To stay informed, sign up for our weekly email newsletter at the top left of this page.

Mark McDermott can be contacted at:

910 17th Street, NW #800, Washington, DC 20006

(202) 331-1440 or mcdermott@mtm-law.com or www.theadoptionadvisor.com

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