Mary K. Wimsett
February 15, 2013
The Adoption Tax Credit was recently made permanent by the legislation Congress passed to avoid the “fiscal cliff.” Congress can still choose to alter the credit in the future with legislation but the credit no longer has to be renewed and revisited each year. The credit applies to ALL adoptions (even foreign re-adoptions) except for Step-Parent adoptions.
The maximum credit is $12,970 and the credit begins to phase out for families with incomes above $194, 580. It phases out completely for families who make more than $234,580. The credit is a dollar for dollar reduction in the amount of federal taxes owed.
The credit is no longer refundable. This means that only families who have federal income tax liability will be able to use it. Families should still claim the credit because the credit can carry forward and families have up to five years to use the credit.
Families who adopt special needs children still qualify for the full amount of the credit and do not need to document adoption expenses. A special needs determination is still required. Children adopted through the foster care system are almost always deemed special needs even if the child has no discernable true special needs such as a mental or physical handicap. Children who are handicapped actually do not automatically qualify for the special needs determination. There must be an active determination by the Department of Children and Families that the child is considered special needs.
The form is still Form 8839, http://www.irs.gov/pub/irs-pdf/f8839.pdf. Adoptive families should consult with a tax professional to ensure that their family receives the maximum benefit from the credit.