On their federal income tax return, adoptive parents may be able to claim a tax credit for qualified adoption expenses and/or income exclusion for employer-provided adoption assistance for qualified adoption expenses for both domestic and international adoption.
For tax year 2009, the maximum credit for qualified expenses of a legal adoption was $12,150.
A tax credit is typically more valuable than a tax deduction because qualified expenses are subtracted dollar for dollar against your tax liability. For example, if you owed $5,000 in federal taxes and have $3,000 in qualified adoption expenses, your tax bill is reduced to
$2,000. If your tax bill is smaller than the credit, the unused portion of the credit may be carried forward for up to five years. The Adoption Tax Credit, which was scheduled to expire in 2010, has been extended for one year, through 2011. The Adoption Tax Credit will see several positive adjustments:
- The maximum credit will increase from $12,150 to $13,170;
- The Adoption Tax Credit was made refundable. If a family has no tax liability, the IRS will refund the amount due.
The extension of the Adoption Tax Credit through 2011 was passed as part of the health care reform bill signed into law by President Obama on Tuesday, March 23, 2010. These tax credit changes have been published in detail by The Journal of Accountancy: “For 2010, the maximum adoption credit is increased to $13,170 per eligible child (a $1,000 increase). This increase applies to both non-special needs adoptions and special needs adoptions. Also, the adoption credit is made refundable. The new dollar limit and phase-out of the adoption credit are adjusted for inflation in tax years beginning after Dec. 31, 2010. Also, the scheduled sunset of EGTRRA provisions relating to the adoption credit is delayed for one year (i.e., the sunset becomes effective for tax years beginning after Dec. 31, 2011). For adoption assistance programs, the maximum exclusion is increased to $13,170 per eligible child (a $1,000 increase). The new dollar limit and income limitations of the employer-provided adoption assistance exclusion are adjusted for inflation in tax years beginning after Dec. 31, 2010. The EGTRRA sunset of provisions relating to adoption assistance programs is also delayed for one year (i.e., the sunset becomes effective for tax years beginning after Dec. 31, 2011).”
Visit the Adoption STAR glossary and search for Adoption Tax Credit for more information and for a link to the IRS website.
The IRS guidelines are available here.
Parents should contact a tax professional to review the IRS guidelines in order to understand the impact of the adoption tax credit and the income exclusion provisions on their own situation.