The Federal Adoption Tax Credit Explained

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

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.