Adoption tax credit changes

One of the things that makes adoption more affordable for families is the adoption tax credit from the U.S. government. (That credit was $12,150 for adoptions finalized in 2009). In past years, that credit was non-refundable.  In 2010, for the first time it is a refundable credit. That’s great news for adoptive families with moderate income and/or low tax liability.

What does this mean?

In the past the adoption credit simply offset any tax liability you had for the year.  For example, if line 44 of your 1040 showed you owing $4200, and you finalized an adoption that year, you would be able to claim $4200 of your adoption credit that year, and not have to pay that $4200 in taxes. (That example is slightly simplified– other factors can come into play too.) But in general any remaining adoption credit ‘carried forward’ for up to 5 years, working to offset future year’s taxes.  If you ended up not having enough tax liability to use up the adoption credit in 5 years, too bad.  It was gone.

In 2010 for the first time that credit is refundable, which means families can now claim it in one lump sum on 2010 taxes EVEN IF their total tax liability is less than the adoption credit.

But here’s where the news gets really great!  This change also applies to families who finalized adoptions as long ago as 2005  and who still have adoption tax credit carryforward. (Wondering how much adoption credit carryforward you have?  Look on line 23 of your last year’s 8839.) 

Now– disclaimer — I am not a tax expert.  Talk to your tax consultant to see how these new rules apply to your family.  And by all means, weigh in below if your knowledge of this goes deeper than mine.

Right now I am looking our 8839 and am hardly daring to hope to see all that money next year.  (New kitchen floor, get outta my mind!)  But if this works as my homestudy agency and the sources below explain, this is excellent news for many moderate-income adoptive families.

Where I got my info:

Adoption tax credit

Enhanced adoption credit in 2010

When are foreign adoptions considered final?