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.
The IRS Guidance 10-66 deals with this issue in Section 3.
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.
