Adoption Tax Credit 2013: Refundable vs. Non-Refundable


While it is great news that the adoption tax credit was made permanent yesterday, many are expressing frustration that the credit appears to be non-refundable. Many families are concerned that without a provision making the tax credit refundable, the credit will not benefit them or if they are benefited the benefit will not be as great. The adoption tax credit has raised many questions, and it will take time for all of the issues surrounding the adoption tax credit to be resolved. We will continue to do research to confirm what we can, but we anticipate that there will be many unanswered questions. Adoptive families should consult their tax advisor or CPA to assist them in understanding how the tax credit may impact them.

The adoption tax credit of $10,000 is a dollar-for-dollar reduction of your tax liabilities. The credit is different than a deduction; in that a deduction reduces the amount of income you earn that is subject to federal income tax. The tax credit, therefore, is usually a greater benefit than a deduction.

There are generally two types of tax credits, a refundable tax credit and a non-refundable tax credit. It appears that the adoption tax credit will not be refundable in 2013 or thereafter. To our knowledge there has not yet been language released indicating that the credit will be refundable. Therefore, because most tax credits are not non-refundable and because for past twelve of the fourteen years that the adoption tax credit has existed, the adoption tax credit has been non-refundable, it is likely that this credit will be interpreted as non-refundable. However, we do not yet know.

Of the two types of tax credits, the refundable credit is generally considered to be the greater benefit. Refundable credits are considered better because a refundable credit can reduce tax liability to below zero, whereas the non-refundable credit can only reduce tax liability to zero.

The adoption tax credit has been both a refundable and non-refundable credit over the approximately fourteen years that the credit has been in existence. The credit was non-refundable for tax years 1997 through 2009. The credit was changed to become refundable for tax years 2010 and 2011. In 2012, the credit became non-refundable again. Now it looks as though with the tax credit is becoming permanent in 2013 and seemingly non-refundable.

While we are excited that the credit has become permanent, we will continue to advocate for the credit to be refundable. Many adoptive parents may not receive the largest benefit that MLJ and others were hoping and advocating for as a member of The Adoption Tax Credit Working Group.

The above is not to be construed as tax advice. Please contact your CPA regarding how the adoption tax credit will impact you. You may also be interested in reading Pamela Smitson, CPA’s blog for more detailed information on how the adoption tax credit has been applied in the past (part 1 and part 2).

IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the United States Treasury, we inform you that any tax advice contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of 1) avoiding tax related penalties or 2) promoting, marketing or recommending to another party any transaction or tax-related matters addressed in this communication.

Photo Credit: 401(K) 2012

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MLJ Adoptions is a Non-Profit, Hague-Accredited adoption service provider located in Indianapolis, Indiana, working in Africa, Eastern Europe, Latin America and the Pacific Isles. We are passionate about serving children in need.