We often receive phone calls about the Adoption Tax Credit, a source of great confusion for many families. The adoption tax credit is an important benefit to promote adoption. But prospective adoptive parents need to know and understand the credit’s limits, particularly if they have low or moderate income.
The most fundamental confusion about the adoption credit relates to how much a family will actually benefit. Many parents complete their taxes and are shocked to learn they’re not going to receive the $13,000 adoption tax credit. Many receive nothing at all. There’s an important distinction between being able to claim the credit and being able to use the credit.
The adoption credit is currently a nonrefundable credit, which means it only offsets a person’s federal income tax liability. (The credit was refundable only in 2010 and 2011.) The credit can be used in the year it is first claimed and then can be carried forward for up to five more years to offset any of those years’ tax liability.
How much of the credit you will receive depends on your income and personal tax situation. The amount of credit you can use is based on your federal income tax liability.
- Families with adjusted gross incomes of less than $30,000 are likely to not benefit at all.
- Those making $30,000 to $50,000 will probably be able to use only a portion of the credit (maybe a few thousand), with the benefit spread out over six years.
- The credit also starts to phase out for families making more than about $200,000.
Federal tax liability is the amount you are responsible for in federal income taxes. If you want to see what your tax liability was in 2013, you can look at line 46 of Form 1040 (or line 28 of Form 1040A). If the line is blank or zero, you had no federal income tax liability. People with no tax liability will not benefit from the adoption credit this year. You can still file for the credit so you can carry it forward to future years in case your tax situation changes. Families should consult with a tax professional about their own tax situation to see if they will be able to benefit from the adoption tax credit.
Efforts continue to encourage Congress to make the adoption tax credit refundable. We encourage everyone to reach out to their representatives to advocate for a refundable adoption tax credit so that more families will benefit and be able to offer homes to children in need of loving, permanent families.
Photo Credit: 401(K) 2013