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Adoption Tax Credit

November 2, 2012

If you are considering adoption as a means to create or add to your family, you may be aware that the United States Internal Revenue Code allows for an Adoption Tax Credit of up to $12,170.00+ for “qualified adoption expenses” paid or incurred by adoptive parent taxpayers. Please keep in mind that the Code allows for a taxcredit (a dollar for dollar reduction of federal tax) and this is not a mere deduction against taxable income. This is by far the largest tax credit available to individual taxpayers. The Credit was made refundable by law for 2010 and 2011, but is not refundable in 2012- meaning only families with federal income tax liability will benefit from this Credit in 2012. Also of significance is that the Adoption Tax Credit is available per child. The Adoption Tax Credit not only encourages parents to adopt children in need, but it makes adoption affordable for many that would otherwise be unable to complete their families.


The qualified expenses for the Credit can include anything that is fundamentally or reasonably related to the adoption of your child. Examples of such qualifying adoption related expenses include, but are not limited to, attorney fees and Court costs, adoption/agency fees, travel fees/ related expenses and, of course, medical expenses.

While all adoptions can receive a tax credit, it is especially important to note that adoptive parents of a special needs child can claim the highest tax credit by documenting their child’s special needs and without having to document their adoption related expenses.


The law places income restrictions on the tax credit. For example, in order to qualify for the full tax credit, adoptive parents’ modified adjusted gross income cannot exceed $189,719.00 in 2012 (up from $185,210.00 in 2011). Adoptive parents whose income exceeded this amount could be eligible for a reduced credit, but the credit would be completely phased out if their annual income reached more than $229,710.00.

Naturally, any expense which can be claimed for a deduction or credit under another provision of the tax code would not qualify. Furthermore, adoption related expenses which are incurred in violation of state or federal law or are reimbursed to the adoptive parent(s) through an employment related program would be excluded from the credit. Expenses incurred relative to the adoption of a step-child are also disqualified. In the case of employer paid or reimbursed adoption expenses, adoptive parents may be entitled to an exclusion from income.

The Adoption Tax Credit applies only to adoptions of children under the age of 18 years, wherein the child is physically or mentally unable to care for themselves. Adoptive parents cannot claim the tax credit for a child that is not a United States Citizen until that adoption is finalized. Parents that attempt to adopt a U.S. child may be able to claim their expenses, even if the adoption never becomes final.


It is extremely important for adoptive parents to keep accurate and organized records of their adoption related expenses so as to take full advantage of this tax credit. Adoptive parents and their tax professionals should also be mindful to submit a copy of their Order of Adoption or Decree with their tax return to avoid any delays in the processing of their refund. Given the documentation requirements, adoptive parents will need to submit a paper return and will not be permitted to electronically file their tax return.


Unless acted upon by Congress, the Adoption Tax Credit will return to its pre-2001 form on January 1, 2013. The Credit will be limited to $6,000.00 for the adoption of special needs children and $5,000 for other adoptions. Also the income phase-out level will return to $75,000.00 to $115,000.00.