The Federal Adoption Tax Credit Explained

by Fred Fauth on November 7, 2012

This article is being contributed by Fred @ One Project Closer.

A few weeks back I wrote about the costs of international adoption. That article was based on our experience adopting twin boys from Guatemala in 2007. Today I’m back with the details on one method for reducing the out-of-pocket cost of adoption in the United States: The Federal Adoption Tax Credit. We took this credit for our adoptions back in tax year 2007, and it’s still available for those of you adopting in 2012.

What is the Adoption Tax Credit?

The Adoption Tax Credit provides dollar-for-dollar relief (in the form of a credit on your federal tax return) up to a legislatively-defined cap ($12,650 per child in 2012) †for “qualified expenses” paid to adopt, or attempt to adopt, a “qualified child”. For 2012, the credit is not refundable, which means you must actually have incurred a federal tax liability in 2012 to take the credit. In previous years the credit was refundable, and you could claim all expenses regardless of whether you incurred a sufficient tax liability or not. Even if you don’t have a sufficient tax liability in 2012, you can carry forward any unused portion of the credit for five years. It’s worth noting that if you adopt two or more children, the credit is doubled, or tripled, as appropriate.

Note: For the purposes of the Adoption Tax Credit, FICA taxes and self employment taxes are not considered federal income taxes.

Who is a Qualified Child?

  • Any child 17 or under who is not a stepchild.

What are Qualified Expenses?

Qualified expenses are all expenses incurred for the purpose of adopting the child except for fees that are reimbursed by an employer or other Government or non-profit agency. In other words, if you claim the credit for expenses, those expenses must be real “out of pocket” expenses that are not reimbursed via another avenue.†Example expenses include:

  • fees paid to an adoption agency (also called dossier fees)
  • fees paid for immigration and naturalization
  • fees paid to a country’s government adoption agency or an attorney to process the adoption
  • unavoidable travel costs associated with the adoption

Income Limitations

For 2012, you can take the full credit if your modified adjusted gross income (MAGI – see the Instructions for Form 8839 linked below for more details) is $189,710. If your MAGI is between $189,710 and $229,710, your credit is reduced by a percentage equal to the amount of your income over $189,710 divided by $40,000. (So for example, if your MAGI is 209,710, your credit would be reduced as follows:†$209,710 – 189,710 = $20,000; $20,000 / $40,000 = .50, or 50%.) If your income is higher than $229,710 (lucky you!), you are not eligible for any credit.

Limits for International Adoption

For international adoptions, you can take the credit only in the year you actually finalize the adoption of the child, which means unsuccessful attempts to adopt internationally will never allow you to claim the credit. You can, however, recover prior years’ costs. The form has instructions for carrying forward disallowed portions of the credit. (Note: I recommend filing Form 8839 each year you have adoption expenses, even if you cannot yet take the deduction. This way the IRS has a record of your ongoing expenses.)

Special Rules for Special Needs Children

If you adopt a special needs child and you qualify within the income limitations described above, you may be entitled the take the full adoption tax credit even if you did not incur the full amount of expenses in adopting the child. †ChildWelfare.gov provides good information on†what exactly qualifies a child as special needs. You should make sure you have appropriate documentation to support the child’s status as special needs.

How to File for the Credit

Fill out Form 8839†as part of filing your tax return. We use TurboTax Online to file our taxes each year and the software took care of filling out this form for us. If you’re not using an automated filing tool, you’ll probably want to read through the Form 8839 Instructions. (You may want to read through the instructions even if you are using an automated tool.)

Note: Both forms linked here are for the 2011 tax year. The 2012 forms have not yet been released by the IRS.

Adoption Taxpayer Identification Number (ATIN) Requirements

To file Form 8839, you’ll need either a Social Security Number (SSN), or an Adoption Taxpayer Identification Number (ATIN) for each child. Since you may not have access to a child’s SSN during the adoption process, the IRS gives you the ability to obtain an ATIN. Here’s the instructions from the IRS.

Credit Limits for 2013 and Beyond

Unless Congress acts, the Adoption Tax Credit is slated to return to 5,000 per child, or $6,000 per special needs child, in 2013. It is quite possible Congress will act, since the credit is popular among many members of both parties and has been extended at higher levels for more than six years now.

Questions?

While I’m not a tax professional, I am happy to answer questions about our experience taking this credit and provide any information I can to help out prospective adoptive families.

About the author: Fred and Kim are the parents of five children, two of whom were adopted internationally. They are also the owners of One Project Closer, a home improvement blog focused on DIY projects, tools, and crafts. Fred and his partner Ethan write How To guides for projects like building a shed. Kim maintains coupons and deals for home improvement stores like AJ Madison.

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Fred Fauth

  • John S @ Frugal Rules

    Interesting. My wife and I have thought about adoption in the past, but are not at this point in time. Do you have to itemize to be able to take advantage of the deductions?

    • Fred @ One Project Closer

      John, You do not have to itemize to be able to take advantage of the credit. It is filed on a separate form and is not part of the Schedule A deductions, which is good. With that said, if you have higher income, the credit is based primarily on AGI, which means that your schedule A deductions do not get taken into consideration when calculating your eligibility for the credit. Fortunately, the numbers for eligibility are pretty high, so most people will be able to take this, and those who can’t likely won’t view finance as a barrier to adoption.

  • http://twitter.com/Eyesonthedollar Kim

    I enjoyed your first post as well as this one. While I don’t see adoption in our future, I think it’s only fair that you get a tax credit. I can’t believe how expensive it is, which is sad. I think there are probably many great people out there who would make good parents, but maybe don’t have that kind of cash to put down. I know lots of teachers who have had issues with having the money to go forward with adoption.

    • Fred @ One Project Closer

      Kim, the finances are definitely one of the hardest parts of adoption, especially for lower income families. I am glad you enjoyed both posts, and I hope to contribute more in the future.

  • http://frugalhabits.net/ Jason Clayton

    Great resource. I didn’t realize there was Federal tax credits for adoption. This is great to know, as many loving parents who want to adopt feel they can’t due to finances.

  • http://www.youngadultmoney.com/ DC @ Young Adult Money

    Thanks for sharing! I mentioned it on your first adoption post that I find these very useful. There are a lot of people looking to adopt and this is some good info to get people started. I probably won’t be adopting for 10 years or so, but I definitely enjoy hearing what the costs are today even if they do change in the future.

    • Fred @ One Project Closer

      Thank you for the encouragement. I enjoyed writing these. I usually write about home improvement over at our site, and it was good to have the opportunity to write about something near and dear to both my wife, Kim, and me.

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