The Federal Adoption Tax Credit; General and Specific Issues

The following is a general overview of the Federal Adoption Tax Credit and attempts to address certain questions that adoptive parents may have.  The ultimate issue with the Tax Credit now is that it is scheduled to sunset at the end of 2012, and most of its significant portions will not apply in 2013.

WHAT IS A TAX CREDIT?  Generally, a tax credit is used to reduce the amount an individual owes in taxes to the federal government.  For example, let’s say that one owes the government $100 in taxes after calculating income, but there is a $10 tax credit available for which one qualifies.  This reduces final tax liability to $90. At the most basic level, this is how the Adoption Tax Credit operates in 2012.  The IRS website provides examples of the applicability of the credit.

WHAT IS THE PURPOSE OF THE TAX CREDIT? It is intended to reimburse individuals and families for certain qualified expenses incurred during the adoption process.  It is also intended as a mechanism to encourage adoption as a method of family growth.

HOW DOES THE TAX CREDIT WORK? This is a one-time credit for each adopted child.  If a child was adopted in 2009, one could claim the credit in 2009.  If the credit was claimed in 2009, it cannot be claimed again the following taxable year.  If one adopted two children in 2009, one could claim the credit twice for that year.  In the years 2010-11, the credit is refundable, meaning that one would actually get a check in the mail if the adoption was finalized in those years, offset by any income tax owed. … <Read More>