What Everyone Must Understand About the Adoption Tax Credit


family - outside- summerThe adoption tax credit can be a wonderful benefit to families looking to add to their family through international adoption! But, it is important that families understand fully how the adoption tax credit works before they make the decision to adopt internationally, especially if they are depending on the tax credit to afford adoption.

The adoption tax credit does not benefit all families equally. Families should review their own individual tax situation, preferably with a tax professional, to understand how or even if they will benefit from the adoption tax credit.

What Does “Refundability” Mean?

Confusion about the adoption credit relates to how much a family will actually benefit. We have heard from families who have completed their taxes and are unpleasantly surprised to find out they can’t use any of the adoption tax credit.

The adoption credit is a nonrefundable credit, which means it only offsets a person’s federal income tax liability. While the credit was refundable in 2010 and 2011, it has not been refundable since then. 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.

But how much you receive depends on your income and personal tax situation. According to North American Council on Adoptable Children (NACAC), 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 not likely to benefit at all. Those making $30,000 to $50,000 will probably be able to use only part of the credit (maybe a few thousand dollars), 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 2015 for a frame of reference, you can look at line 47 of Form 1040 (or line 30 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 if your tax situation changes. Please note that the amount on line 47 is not exactly what someone would receive because there are some credits that come before the adoption credit.

In short, claiming the credit is very different from being able to use the credit, and many people will not benefit at all. You will need to carefully review your personal tax situation to determine if you can use the credit.

Want to learn more?

On January 31, 2017, NACAC will be offering a webinar on the adoption tax credit. The webinar will cover information about the current status of the credit, how to claim the credit with your taxes, and how to amend past years’ taxes (back to 2013) if you haven’t filed. The fee for the webinar is $15 for NACAC members and $20 for nonmembers. You may learn more and register here.

The adoption tax credit is an important benefit to promote adoption. But parents need to know the credit’s limits, particularly if they have low or moderate income. Consult a tax professional to find out specifically how you will benefit from the Adoption Tax Credit.

Sheri Molnar is the Director of Operations and Finance at MLJ Adoptions. Visiting children living in institutions in Honduras and Congo has provided her with a tremendous motivation to come into work each day and work tirelessly on behalf of children in need of loving, permanent homes.