Dramatic Changes to Adoption Tax Credit for 2013

October 21, 2012

If you’ve been paying attention to what Congress is (or isn’t) doing this year, chances are you’ve heard that several advantageous estate and gift tax provisions are set to expire at the end of this year.  However, it’s less likely you’ve heard that the adoption tax credit—one of the largest tax credits available to families–is set to expire for most families at the end of 2012, too.

Aside from being one of the largest tax credits, the adoption tax credit has a history of being one of the most changeable and confusing credits as well.  In 2011, the credit was a refundable credit of $13,360 per child.  In 2012, it decreased to $12,650 and became non-refundable–meaning that if the adopting family doesn’t have $12,650 in federal tax liability in 2012, they won’t receive a refund for the unused balance of the credit, but they will be able to carry the unused balance over and apply it to tax liability for the next five years.

In 2012 and previous years, the credit has been available for most adoptions except stepparent adoptions.  Families that adopt “special-needs children”—usually children in foster care–have also been allowed to take advantage of the full amount of the credit, whether or not they actually have that much for upfront adoption expenses.

That all changes dramatically on January 1, 2013.  The adoption tax credit will drop to $6,000.  Even more dramatically, this reduced credit will only be available for domestic adoptions of special-needs children, and will only apply to upfront expenses.  Since adoptions from foster care usually have few, if any, upfront costs, very few families will be eligible for the tax credit in 2013.

With only a little over two months left before the credit expires, there may not be that much prospective adopting families can do to take advantage of the credit before it’s gone.  However, if you adopted a child in the past few years and didn’t claim the credit, there may still be time to file an amended return.  The IRS is notorious for auditing returns claiming the adoption credit, so it’s a good idea to consult your accountant and attorney to make sure you have the right documentation to back up your return.

This information is general in nature and should not be construed as tax or legal advice.