If you are considering adoption, or in the adoption process, you probably have heard about the Federal Adoption Tax Credit (ATC). Unfortunately, there is a lot of confusing information about the ATC and I would like to clear that up for you. It is understandable that it is confusing because the rules keep changing.
The ATC is available for adoptive parents who have adopted a child who is not their spouse’s child. It is available for foster care adoptions, private domestic adoptions, and international adoptions. The rules for each type of adoption are a little different.
- For foster care adoptions, the adoption tax credit does not require qualified adoption expenses to be spent to qualify for the credit IF the child is determined by the state or county to be special needs. This means that the state is providing adoption assistance/subsidy in the form of a monthly subsidy, Medicaid, and/or reimbursement of non-recurring adoption expenses. The ATC is filed in the year the adoption is finalized
- For international adoptions, the family receives a credit for the qualified adoption expenses they pay for the adoption, and usually it is higher than maximum amount of the ATC. Like foster care adoptions, they must file for the ATC in the year it is finalized.
- For private domestic adoptions, adoptive parents must document qualified adoption expenses to qualify for the adoption tax credit, just like international adoptions. Unlike foster care and international adoptions, private domestic adoptions can file for ATC in multiple years. They MUST file after they pay the qualified adoption expenses, or if they finalized the adoption the year expenses were paid. For example: a family pays qualified adoption expenses in 2010, 2011, and 2012 and then finalizes their adoption in 2012, they will file for 2010 expenses on their 2011 taxes, and the 2011 and 2012 expenses on their 2012 taxes.
You may have heard about families who have received refunds of their full ATC in 2010 and 2011. That is because in those two years, the adoption tax credit was refundable, which meant regardless of their financial situation they were able to use the full amount of the credit (note there is an income limitation for higher income folks).
Unfortunately, when Congress passed legislation on January 2, 2013 they extended the adoption tax credit but didn’t make it refundable. But they did make it permanent so it is available to all adoptions (except step-parent) in 2013 and in the future. That means that a family’s ability to use the ATC is limited by what they owe in income tax (see line 46 of the 1040) and not all families will be able to use the ATC at all. NACAC and the Dave Thomas Foundation for Adoption are both part of the Save the Adoption Tax Credit group continues efforts to make the credit refundable.
Josh Kroll is project coordinator of the Adoption Subsidy Resource Center, a program of the North American Council on Adoptable Children. He has extensive knowledge of federal and state laws and policies about adoption subsidies. Josh is an adviser to the National Foster Parent Association and was named Angel in Adoption for his work on the adoption tax credit in 2012.