Federal Adoption Credit
The federal adoption tax credit has been made permanent. On January 1, 2013, Congress passed the American Taxpayer Relief Act of 2012; President Obama signed the bill into law on January 2. The legislation contains a permanent extension of the adoption tax credit. Although Congress could at some point revoke the tax credit, it no longer automatically sunsets after a certain period.

Most of the features of the previous adoption tax credit are retained. As before, the tax credit allows an individual to take a credit for qualified adoption expenses against income tax (and alternative minimum tax). Here are some of the features of the permanent adoption tax credit:

  • The credit is available for each child adopted.
  • The credit is available for expenses incurred in a failed adoption.
  • For adoption of a special needs child, the credit is available regardless of and without requiring proof of actual adoption expenses.
  • Although the credit cannot be taken in a step parent adoption, it generally is available in relative adoptions or second parent adoptions, in which unmarried persons whether same sex or otherwise -- adopt each other's children. However, for purposes of qualifying for the tax credit, it may be important that the "adopting" second parent pay the adoption expenses out of his or her own funds, rather than from joint funds.
  • The credit is no longer refundable as it was in 2010 and 2011. Thus, the credit is only beneficial if the adopting taxpayer owes federal taxes. However, as before, the credit can be carried forward for up to five tax years.

For tax year 2012 The maximum federal adoption tax credit, which is adjusted each year based on cost of living allowance, is $12,650. The full credit is available to taxpayers with modified adjusted gross income of $189,710 or less and phases out to zero for modified adjusted gross income of $229,710.

Note that the IRS will not allow electronic filing by those seeking the adoption tax credit for 2012. The Form 1040 return and the Form 8839 Qualified Adoption Expenses schedule must be filed by mail.

For tax year 2013 The maximum federal adoption tax credit for tax year 2013 is $12,970. The full credit is available to taxpayers with modified adjusted gross income of $194,580 or less. The credit phases out completely at $234,580 adjusted gross income.

Federal Adoption Exclusion
If adopting parents benefit from an employer's qualified adoption benefit program, the benefits received may be excluded from income for tax purposes. The amounts of the applicable exclusion for adoption assistance benefits provided by an employer are the same as those for the adoption credit.

Forms and Resources

Information from the IRS regarding the Tax Credit
- www.irs.gov/taxtopics/tc607.html
- IRS instructions for Form 8839

State Tax Credit/Exclusion
In addition to the federal adoption tax credit, your state may offer a tax credit or exclusion. Check with your accountant or attorney to determine whether a state tax credit or exclusion may be available to you.

Important Disclaimer
The information in this page is not intended and should not be relied upon as legal advice. As always, in order to determine whether a tax credit or exclusion is available in any specific situation, you should consult your accountant, attorney, or tax advisor.