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.