THE GOOD NEWS: Families who adopt a child in 2012 may be eligible for the Adoption Tax Credit of up to $12,650. A tax credit is a dollar for dollar reduction in your overall tax liability. This is a much more valuable benefit than a tax deduction which only lowers your taxable income and reduces your taxes according to your tax bracket
For the 2012 tax year, adoptive families with modified adjusted gross incomes of up to $189,710.00 should be eligible to receive the full $12,650.00 adoption tax credit! Adoptive parents of SPECIAL NEEDS CHILDREN (as determined by the state) may qualify for the full $12,650.00 tax credit regardless of whether or not they have incurred any actual expenses.
THE BAD NEWS FOR 2013: Unless Congress votes to extend the Adoption Tax Credit, the existing credit will expire. Starting in 2013, only families who adopt special needs children from foster care will be eligible for up to $6,000 in the adoption tax credit. However, the credit will be based on expenses so families would need to have qualified adoption expenses to claim any credit. The credit will not be refundable, so families can benefit only if they have federal income tax liability. The income limits for the credit will also be reduced significantly in 2013, meaning that families with higher incomes will not benefit. This part of the adoption tax credit was made permanent for special needs adoption when the credit was first created.
The message is clear: if you are in a position to finalize an adoption this year, the time to act is NOW. Court calendars will be overflowing with folks trying to get in under the wire, so the sooner you can set a date the better.