Claiming the Federal Adoption Tax Credit for 2012
Updated April 2014
(If you finalized your adoption in a year other than 2012, please read the appropriate fact sheet using the links at the left.)
For adoptions finalized in 2012, there is a federal adoption tax credit of up to $12,650 per child. The 2012 adoption tax credit is NOT a refundable credit, which means taxpayers can only get the credit refunded if they have federal income tax liability (see below). Even if the adoption process started in 2011 or expenses were paid in 2011, any credit claimed in 2012 is nonrefundable.
The credit is paid one time for each adopted child, and should be claimed when taxpayers file taxes for 2012.
To be eligible for the credit, parents must:
- Have adopted a child other than a stepchild — A child must be either under 18 or be physically or mentally unable to take care of him or herself.
- Be within the income limits — How much of the credit parents claim is affected by income. In 2012, families with a modified adjusted gross income below $189,710 can claim full credit. Those with incomes above $229,710 cannot claim the credit; those with incomes from $189,710 to $229,710 can claim partial credit.
The Amount of Credit to Be Claimed
Families who finalize the adoption of a child with special needs in 2012 (see details below) can claim the full credit of $12,650 on the line that asks for their expenses—whether or not they had any expenses.
Example — A woman adopts three of her grandchildren from foster care and the state paid all of the fees. All three children receive monthly adoption assistance benefits and thus are considered special needs. The grandmother earns less than $189,710 so can claim the full credit of $12,650 per child for a total of 37,950. How much the grandmother actually receives, however, will depend on her tax liability (explained below).
Other adopters can claim a credit based on their qualified adoption expenses, which are the reasonable and necessary expenses paid to complete the adoption as long as those expenses are not reimbursed by anyone else. If the expenses are less than $12,650, the adopters claim only the amount of the expenses. If expenses exceed $12,650, the maximum to be claimed is $12,650 per child.
Example — A couple adopted two children from China and had $40,000 in legal, travel, and agency fees. They received a grant of $20,000, leaving them with $20,000 in qualified adoption expenses. They can claim only $20,000 (not the full $25,300 they might have been eligible for had their expenses been higher). If their modified adjusted gross income was between $189,710 and $229,710, they would receive only a portion of the credit, since the credit begins to phase out at incomes of $189,710.
When to Claim the Credit
Parents who adopt a child with special needs and are not basing their request on expenses claim the credit the year of finalization. Parents who adopt internationally cannot claim the credit until the year of finalization. Parents who are adopting from the U.S. and claiming qualified adoption expenses can claim the credit the year of finalization or the year after they spent the funds.
Example — A family begins adopting a U.S. infant in 2010 and pays $4,000 in expenses in 2010, $5,000 in 2011, and $3,000 in 2012. The adoption finalizes in 2012. The parents must file for the $4,000 spent in 2010 on their 2011 taxes. They cannot claim the $5,000 and $3,000 until they file their 2012 taxes.
Qualifying as Special Needs
Families who finalized in 2012 the adoption of a child who has been determined to have special needs can claim the full credit of $12,650 regardless of their adoption expenses. The credit for all other adopted children is based on the family’s qualified adoption expenses.
Basically, a child with special needs is a U.S. foster child who receives adoption subsidy or adoption assistance program benefits (which can include a monthly payment, Medicaid, or reimbursement of nonrecurring expenses). The instructions for the 2012 tax credit explain that to be considered a child with special needs, the child must meet all three of the following characteristics:
- “The child was a citizen or resident of the United States or its possessions at the time the adoption effort began (US child).
- A state (including the District of Columbia) has determined that the child cannot or should not be returned to his or her parents’ home.
- The state has determined that the child will not be adopted unless assistance is provided to the adoptive parents. Factors used by states to make this determination include:
- The child's ethnic background and age,
- Whether the child is a member of a minority or sibling group, and
- Whether the child has a medical condition or a physical, mental, or emotional handicap.”
Just because a child is disabled does not mean the child is special needs under the tax credit. No child adopted internationally is considered special needs for the adoption tax credit. Not even every child adopted from foster care is considered special needs (about 10 percent of children adopted from care do not receive adoption assistance support). Those who do not receive any support from the adoption assistance program are likely not to have been determined to have special needs.
Bottom line, if your child does not receive adoption subsidy/adoption assistance benefits, you will likely have to have qualified expenses to claim the credit.
How Much Taxpayers Will Benefit
How much, if any, of the adoption tax credit a parent will receive depends on their federal income tax liability in 2012 (and the next five years). In one year, taxpayers can use as much of the credit as the full amount of their federal income tax liability, which is the amount on line 46 of the Form 1040 less certain other credits (see Child Tax Credit below). Even those who normally get a refund may still have tax liability and could get a larger refund with the adoption tax credit. Taxpayers have six years (the year they first claimed the credit plus five additional years) to use the credit.
People who do not have federal income tax liability will not benefit. We encourage them to file a Form 8839 to document the credit. They can then carry the credit forward to future years since the credit may become refundable again in the future or their tax situation may change. (If your tax preparer wants to charge you extra to file the Form 8839 and you won't benefit at all with your 2012 taxes, you might want to wait and amend your taxes if the credit is ever made refundable.)
Below are a couple of examples of how the tax credit might benefit families who finalized adoptions in 2012 (these are simplified examples, which do not take into account the Child Tax Credit explained below).
Example 1 — A couple adopted two brothers who had been determined to have special needs. The parents had $6,500 in federal income tax withheld from their paychecks, and their tax liability is $7,000, which means they would normally owe $500 to the IRS. Their adoption tax credit is $25,300, and they can use $7,000 (their tax liability) of that with their 2012 taxes. They get a refund of the $6,500 they had already paid, and can carry over $18,300 for up to five more years.
Example 2 — A couple adopted three siblings with special needs. They had $1,000 in federal income tax withheld from their paychecks, and their tax liability is $0, which means they would receive a refund of $1,000. They have $37,950 in the adoption tax credit, but they cannot use it with their 2012 taxes since they have no federal tax liability. They should still file Form 8839 with their 2012 tax return so that they can carry the credit forward for up to five additional years in case their tax liability goes up in the future or the credit becomes refundable.
Interaction with the Child Tax Credit
If parents can claim their child as a dependent, then they should also look into the Child Tax Credit. The Child Tax Credit and the Adoption Tax Credit interact and may reduce the Child Tax Credit a family can claim. To determine the amount of the Child Tax Credit they can use, a family must complete the Child Tax Credit Worksheet in IRS Publication 972.
Taxpayers who can answer Yes on the last line of the Child Tax Credit Worksheet may be eligible for the Additional Child Tax Credit, which is a refundable credit (meaning they can claim the credit regardless of their tax liability). To claim the Additional Child Tax Credit, parents must complete IRS Form 8812.
To claim the credit, taxpayers will complete a 2012 version of IRS Form 8839 and submit it with a Form 1040X to amend their 2012 taxes. (If they never filed for 2012, they would submit the Form 8839 with an original Form 1040 for 2012.) Before filing, taxpayers should review the 2012 Form 8839 instructions carefully to be sure they apply for the credit correctly. The instructions contain a worksheet needed to calculate tax liability and thus how much of the credit will be received. Both the form and instructions are available at irs.gov and in the Forms section of this web site.
The instructions state that taxpayers must file their tax return by mail to claim the adoption tax credit. There is no requirement to submit documentation in 2012 (documentation was required in 2010 and 2011 when the adoption credit was refundable).
Claiming the Credit
What If I Have Additional Questions?
If you have additional questions on the adoption tax credit, contact the North American Council on Adoptable Children at 651-644-3036 or firstname.lastname@example.org.