What you should know about the Adoption Tax Credit

April 26th, 2013 by

Tax season may be drawing to a close (unless you filed for an extension) but there are still many reasons you should periodically size up your financial situation throughout the year. For example, if you recently adopted a child or attempted to adopt a child, your tax status may have changed. Adding to your family through adoption is a major event, and can incur some serious expenses. However, by taking the appropriate steps, you can ensure that you don’t bear a heavier financial burden for the adoption than necessary.

One way to offset some of your expenses is to see if you qualify for the adoption tax credit, which was instituted to encourage families to adopt children. The adoption tax credit makes adoption possible for some families who could not otherwise afford it.

If you recently adopted a child or attempted to adopt a child, you may be eligible for the credit, or be able to exclude some of your income from tax.

How The Adoption Tax Credit Works

For 2012, the tax credit is nonrefundable. In other words, the credit may reduce your tax to zero, but you cannot receive any additional amount in the form of a refund.

If your credit exceeds your tax, you may be able to carry forward the unused credit. This means that if you have an unused credit amount in 2012, you can use it to reduce your taxes for 2013. You can carryover an unused credit until you fully use the credit, or up to five years, whichever comes first.

Eligibility

To be eligible for the adoption tax credit, the child you adopt must generally be under 18 years of age. However, an exception can be made for children who are physically or mentally unable to care for themselves. The maximum adoption tax credit and exclusion for 2012 is $12,650 per eligible child. The tax credit varies from year to year, as it is based on when the adoption was finalized.

Qualifying Expenses

Expenses qualify for the tax credit only if they directly relate to the legal adoption of the child. They must also be reasonable and necessary. Examples of qualifying expenses include adoption fees, court costs, attorney fees, and travel costs, including the cost of meals and lodging away from home.

Special Circumstances

If you adopted a child with special needs, you can claim the full credit without documenting your expenses. A child can be considered “special needs” if any of the following factors are present: Ethnic or racial background; age; membership in a sibling group; medical, physical, or emotional disabilities; risk of physical, mental, or emotional disability based on birth family history; or any condition that would make it more difficult for the child to find an adoptive family.

If you think you may qualify and would like assistance in applying for the tax credit, please contact us at (412) 281-4666. You can also visit www.irs.gov for more information about the tax credit.