Adoption News: The Adoption Tax Credit is now Permanent

Did you hear that the Adoption Tax Credit became a permanent part of the tax code on January 2? Up until now it’s been temporary and was set to expire in 2012.


(Disclaimer: I’m explaining this to the best of my knowledge. I might be mistaken about somethings. Check with a CPA before filing your taxes. Also, I’m not sure if this information has officially been released as documentation from the federal government for 2013 and beyond.) The Adoption Tax Credit is a non-refundable $10,000 (adjusted annually for inflation…estimated to be $12,077 for 2013) credit applied to the year the adoption is finalized. It’s non-refundable which means you won’t get back more money than your annual tax rate and you have to have documentation to prove all of your adoption related expenses.

Example 1: Adoption costs $18,000
Couple’s annual tax rate is $15,000
Maximum amount of the tax credit – $12,077 is subtracted from their tax rate
Taxes owed: $2,923

Because their tax rate and their adoption expenses are more than the maximum credit, they get the full amount of the tax credit

Example 2: Adoption costs $40,000
Couple’s annual tax rate is $8,000
The maximum amount credited for their adoption is $8000
Taxes owed: 0

Even though their adoption cost more than the maximum credit, they can only get credited up to what they owe in taxes that year.

Example 3: Adoption costs: $5,000
Couple’s annual tax rate is $12,000
The maximum amount credited for their adoption is $5,000
Taxes owed: $7,000

Because their tax rate is higher than the cost of the adoption and the adoption is less than the maximum credit, they get all of their adoption expenses credited.

These numbers are all made up but I think it helps to see how it plays out with various scenarios. We fall into the third category. (Again, numbers made up for this example.) Ali’s adoption, finalized in 2012, cost less than the tax credit and is also less than our tax rate. It’ll still save us some money on our taxes this year which is nice.

Special needs (including some “hard to place”) adoptions are in a different class. They receive a refundable flat rate tax credit of some amount (I don’t know if it’s been released yet). That means families who adoption a special needs child get that amount of money back in the year of the finalization regardless of what the adoption cost and regardless of what their tax rate is. To that I say – Kudos. We need more people to adopt, ESPECIALLY special kids. And the financial and emotional strains on a family with a special needs child are typically much higher.

Photo above is from Alianna’s adoption day taken by Beth Rose Photography.

This is a good article and where I got most of my information.



7 Responses to Adoption News: The Adoption Tax Credit is now Permanent

  1. It’s amazing that the government is getting on board with adoption. The Canadian province I live in recently began a subsidy program for people adopting a sibling group or child over 10yrs from foster care. It’s $950/mth per child until they reach 18yrs. It’s made a world of difference for me, a single foster mom, who just adopted two sisters in my care.

  2. K says:

    Our boys were considered “hard to place” and, thus, we received the refundable flat rate credit. They have no emotional or medical special needs. They were considered “hard to place” simply because they were a sibling set and because they were older (at 4 & 5 at time of adoption). Our adoption was finalized in 2011 so it may be a bit different.

    Thanks for all this info! I’m passing it on to friends.

  3. anniegoat says:

    Ok… I’m still waiting to hear back from the two CPA’s I called. But if you owe no taxes and were getting a refund would you get the credit refunded back? Or does it only apply if you owe the government taxes?

    • mahlbrandt says:

      I’m guessing on this since I don’t know your specific financial situation or income. Unless you don’t make any money, I’m assuming you owe the government at least SOME tax for 2012. You might be referring to a refund from your withholdings… For most people, every paycheck some of your income is sent to the IRS to hold until it’s time for your taxes to be due (april the next year). If you had more withheld that you owe, they send you a refund check. That doesn’t mean you don’t/didn’t owe taxes, it just means you sent the IRS more than necessary throughout the year. If you truly do not owe any taxes (which is true for many low income Americans), you won’t be getting an adoption tax credit either.

      • mahlbrandt says:

        PS. If you look at your (Michael’s) last paycheck from 2012, you should see a line that will show how much Federal Income Tax was deducted for the Year-to-Date. That’s how much of your money the IRS is holding for your 2012 taxes. Compare that to your tax return for 2011 (unless your income has changed significantly). Your 2011 tax return should give you a good indication of how much tax you’ll pay for 2012. It’s Line 61 on Form 1040 if you want to check your tax return from last year.

        • anniegoat says:

          Thanks Martina! I can’t wait for the government to release the forms needed to file. I just want to know what we are getting ourselves into.

  4. Our agency had hit us up with this info. It was a relief to us, but as you know- nothing would have stopped us from adoption. God provides all we need. However I know that when people are first considering the costs often blind them to the possibility. It’s great to be able to say “oh- but have you heard of the tax credit?”!

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