Adoption Tax Credit

Adoption Tax Credit Survives – 2012 and Beyond

The adoption expense tax credit has been around since 1997, but it was set to go out of existence at the end of 2012. Fortunately, a part of the fiscal cliff legislation, passed by Congress and signed by the President on January 2, 2013 made the adoption tax credit permanent. (American Taxpayer Relief Act of 2012 [Pub. L. No. 112-240])

All of the ground rules remain the same as they were for the year of 2012 except that the amount of the maximum credit will increase, as will the numbers that define the lower and upper limits of income eligibility. All three of these numbers are adjusted each year in accordance with the cost of living. The maximum credit for 2013 will be $12,970 (up from the 2012 number of $12,650) and the full credit will be available to taxpayers with a modified adjusted gross income (AGI) of $194,580 or less. The credit will then phase out completely at an AGI of $234,580.

All of the other features remain intact, including:

  • the ability to carry the credit forward in order to use it up,
  • the ability to claim a flat credit (without the need to show actual expenses) for the adoption of a special needs child, and
  • the ability to claim the credit in the case of a failed adoption attempt.

There is one limitation as the permanent tax credit is not refundable. It was refundable during 2010 and 2011 due to a provision of the health care legislation. Since this provision was not in the 2001 legislation (Economic Growth and Tax Relief Reconciliation Act) that was just made permanent, it is not a part of the current law.  Specific tax questions about how these changes may impact on your tax situation should be addressed to a qualified tax advisor.

Tax information summary above courtesy ofAAAA Fellow, Mark T. McDermott.

IRS Topic 607

Tax benefits for adoption include both a tax credit for qualified adoption expenses paid to adopt an eligible child and an exclusion for employer-provided adoption assistance. For tax years 1997 through 2009, the credit was nonrefundable. For 2010 and 2011, the credit was refundable. For tax year 2012, the credit has reverted to being nonrefundable, with a maximum amount (dollar limitation) of $12,650 per child.

Qualified adoption expenses 

Qualified adoption expenses for both the credit and the exclusion include reasonable and necessary adoption fees, court costs, attorney fees, traveling expenses (including amounts spent for meals and lodging while away from home) and 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 himself or herself.

Income and dollar limitations 

The credit and exclusion are each subject to an income limitation and a dollar limitation. The income limit on the adoption credit or exclusion is based on your modified adjusted gross income (MAGI). For tax year 2012, the MAGI phase out begins at $189,710 and ends at $229,710. Thus, if your MAGI is below $189,710 for 2012, your credit or exclusion will not be affected by the MAGI phase out, but if your MAGI for 2012 is above $229,710, your credit or exclusion will be eliminated. If your MAGI for 2012 falls between $189,710 and $229,710, your credit or exclusion will be reduced.

The credit and exclusion are each limited to a specific dollar amount ($12,650 for tax year 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. For example, if you claimed a $3,000 credit in connection with a domestic adoption in 2011 and paid an additional $12,650 of qualified adoption expenses in 2012 (when the adoption became final), the maximum credit you can claim in 2012 is $9,650 ($12,650 dollar limit, less $3,000 of qualified adoption expenses claimed in 2011).

The dollar limitation applies separately to both the credit and the exclusion, and you may be able to claim both the credit and the exclusion for qualified expenses paid in adopting an eligible child. However, any allowable exclusion must be claimed before any allowable credit is claimed. Any exclusion of expenses reduces the amount of expenses available for the credit, and you cannot claim both a credit and an exclusion for the same expenses. Examples 1, 2, and 3 illustrate these rules.

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Form 8839 and instructions - Adoption Tax Credit 

To claim the credit or exclusion, complete Form 8839 (PDF), Qualified Adoption Expenses, and attach the form to your Form 1040 (PDF) or Form 1040NR (PDF).

There is no longer a requirement to attach the adoption documentation to 2012 returns. However, documentation must be kept as part of a taxpayer’s records.

The IRS encourages taxpayers to use tax preparation software to prepare their Forms 1040 and Forms 8839. However, instead of filing electronically, they must print and mail their completed forms to the IRS.