Early in February, I was once again a guest on the Creating a Family radio show. The show is a weekly one hour internet radio podcast covering topics related to adoption and infertility. Similar to my last appearance, I was invited to talk about the Adoption Tax Credit for 2013. I appeared with the shows host Dawn Davenport and Josh Kroll, the adoption tax credit expert at the North American Council on Adoptable Children.
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.
A few weeks ago, I appeared on the Creating a Family radio show to discuss the refundable Adoption Tax Credit for 2011 and 2012. I appeared with host Dawn Davenport as well as Megan Lindsey of the National Council for Adoption and Josh Kroll of the North American Council on Adoptable Children.
On December 14th, I spoke with Dawn Davenport on her Creating a Family radio show. Our conversation focused on the Adoption Tax Credit. Take a listen – we covered some great information. Additionally, for another resource, take a look at Creating a Family’s FAQ page on the Adoption Tax Credit.
The adoption tax credit is adjusted each year based upon the cost of living allowance. The adjusted numbers have been published by the IRS in Revenue Procedure 2011-52. The maximum credit for 2012 will be $12,650. The full credit will be available to taxpayers with modified adjusted gross income of $189,710 or less and the amount of the available credit phases out to zero as modified adjusted gross income approaches $229,710. It will not be a refundable tax credit in 2012.
On Friday, Dec. 17, 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which extended the adoption tax credit until Dec 31, 2012. However, the refundability of the credit ends as of Dec. 31, 2011, returning to the old tax credit format (with an inflation adjustment).
The adoption tax credit will be refundable in 2011, but not for 2012. The refundability was created earlier this year by the Patient Protection and Affordable Care Act and is in effect until Dec. 31, 2011.
The Joint Tax Committee says that for 2012, the maximum benefit will be $12,170 (indexed for inflation after 2010).
As part of the health care bill signed into law by President Obama on March 23, 2010 (Patient Protection and Affordable Care Act P.L. 111-148), the adoption tax credit (ATC) was preserved for 2011 and increased to $13,360.
Additionally, the tax credit is now refundable. This means that even families that owe zero taxes can receive the full tax credit in the form of a tax refund to help with their adoption-related expenses.
In cases where families have already finalized an adoption – say for example in 2008 or 2009, but due to the family’s low income and low tax liability the family could not use the full ATC, the unused amount carried forward to future tax years.
Now, with the 2010 change and the “refundable” nature of the ATC for 2010 and 2011, the act allows those past tax year carry forward ATC amounts to be refunded in cash in 2010.
More information on the differences between Refundable vs. Non-Refundable Tax Credits:
A direct, dollar-for-dollar reduction of one’s tax liability. That is, if a taxpayer otherwise owes $2,000 to the government in income tax, but has $1,000 in tax credits, then the taxpayer only owes $1,000. Tax credits may be either refundable or non-refundable. A refundable tax credit means that if one’s tax liability goes below zero, the government owes the taxpayer the remainder of the credit. Non-refundable credits mean that the tax liability cannot go below zero. Relatively few tax credits are refundable; most are limited to the amount of one’s tax liability. However, the earned income tax credit is a common example of a refundable credit.
Here is a link to an article I wrote on the most common questions regarding the adoption expense tax credit, including its provisions for international and domestic adoption. It was published in Adoptive Families Magazine.
More Information on the Tax Credit:
A Federal tax credit for adoption expenses has been available since 1997. Unless extended by Congress, the credit will cease to exist on 12/31/10 for all adoptions except those involving children with special needs. The adoption community has always anticipated that the credit would be extended, but that expectation has now been tempered by the current economic crisis. Despite that impediment, there are several bills pending in Congress to extend the credit (S. 722, S. 2816 and H.R. 213 the text of which can be viewed at http://thomas.loc.gov). Members of the adoption community should encourage their elected representatives to extend the tax credit.
The amount of the maximum tax credit is increased annually based upon the cost-of-living allowance (COLA). Based upon COLA, the individual income levels at which the credit is phased out are also increased each year. For 2010, the maximum credit is $12,170 per child. Full details about the 2010 COLA adjustments, were announced by the IRS in Revenue Procedure 2009-50 that can be viewed at http://www.irs.gov/irb/2009-45_IRB/ar11.html (the relevant paragraphs are paragraph .03 and paragraph .14)