Wednesday, January 2, 2013

The Adoption Tax Credit: What It Is and How It Helps Orphans

"The permanent extension of the Adoption Tax Credit not only guarantees vital financial help for families that choose to adopt.  It also underscores the commitment of the American people to the idea that children need families."

- Jedd Medefind
Christian Alliance for Orphans

The Good News For Orphans and Adopting Families

Many people wonder why adoption can be so expensive since there are millions of children needing homes. I agree that it shouldn't cost so much to adopt and the US Congress agrees too. I don't know your opinion on the American Taxpayer Relief Act aka the“Fiscal Cliff” Bill. (I am sure there are as many opinions on the Fiscal Cliff Bill as there are readers of this blog post.) Whether you agree with the whole bill or only a few parts of it, there is good news in this bill for orphans in the US and around the world, as well as for families who adopt.  Families can continue to offset their expenses in adoption with the Adoption Tax Credit, which was set to expire at the end of 2012, that was made permanent in the the Fiscal Cliff Bill!

How the Adoption Tax Credit Works

  • The Adoption Tax Credit was originally set at $10,000 in 2001 under President Bush. Going forward, the tax credit will be the $10,000 adjusted for inflation since 2001. For 2013, the maximum adoption credit and exclusion $12,970 per child.

  • The credit is per child, the maximum you claim depends on the number of children you adopt. If you adopt two children, your maximum is $12,970 x 2 or $25,940. If you adopt four children, the maximum is $12,970 x 4 or $51,880. For purposes of the tax credit, there is no limitation on the number of children you can adopt. 

  • The credit begins to phase out at incomes of $194,580, and is phased out completely at $234,580.

  • The  Adoption Tax Credit was made permanent in 2013. It won’t need to be renewed every year, as it has in recent years. Congress will still be able to make changes to the tax credit in future legislation.

  • The credit will be available for families who have completed adoptions both domestically and internationally.

  • The credit is for documented, qualified adoption expenses such as agency or lawyer fees, travel expenses, court fees, etc. (Keep a file folder with documentation of everything you pay for your adoption!)

  • For special needs adoptions from foster care, the credit will be a flat amount (the $10,000 adjusted for inflation) without regard to actual out of pocket expenses.  Domestic foster adoptions of children with special needs will be eligible for the full maximum credit even if very little was spent in the adoption process.  

  • The credit will also exempt from taxes any adoption benefits provided by employers.  

  • The credit is not “refundable”—meaning that it will not result in a payout from the government to those who have no tax liability. (It was refundable in some years.)

  • The the remaining unused balance of the tax credit can be carried forward up to five additional years. (Good news for families like ours, since we don't exactly come close to $12,000 in federal income taxes in one year). Taxpayers have six years (original year + five additional years) to use the credit. Adoptive families who file taxes should include a Form 8839 to establish the adoption tax credit even if they do not believe they will receive a refund. Families may have tax liability in future years and establishing the credit would save them from having to go back and amend taxes once they were able to benefit. 
PS. This is not meant to be legal counsel or tax advice. Talk with your tax attorney or CPA ;-)

"Three Cheers: Adoption Tax Credit Made Permanent!" byJedd Medefind of Christian Alliance for Orphans

FAQs on the Adoption Tax Credit by Jedd Medefind of Christian Alliance for Orphans

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