The federal adoption tax credit is a provision of federal tax law that permits you to gain a tax credit for qualified adoption expenses. The cap was $10,000 when the law was first created but it has increased over time. It is now $12,500. While an adoption does not have to finalize in order to take the credit (such as if you spend money on a prospective adoption but it fails), but you can only take the credit once per adopted child OR adoption effort. In the past, the credit could only be used to offset taxes due, but since 2010, it has been a refundable credit, which means that even someone with zero income can take the credit and get cash back from the government.

Frequently Asked Questions about the Federal Adoption Tax Credit

Can the Federal Tax Credit Help Pay for My Adoption?

The federal tax code includes a provision which can help offset the cost of adoption. The law permits a taxpayer to take a credit against taxes due for qualified adoption expenses. The cap was originally $10,000 but it has increased over time. It is now $12,500. While an adoption does not have to finalize in order to take the credit (such as if you spend money on a prospective adoption but it fails), you can only take the credit once per adopted child -or- adoption effort.

It is now a refundable credit. In the past, the credit could only be used to offset taxes that you owe. However, because of a recent change in law, during 2010 and 2011 it is a refundable credit. This means that even someone with zero income can take the credit and get cash back from the government.

Can Couples Doing a Step-Parent Adoption Use This Credit?

Unfortunately, no. The law specifically states that step-parents cannot use this credit. The reason for this is that the adoption tax credit was originally created to encourage foster care adoptions and adoptions from the public adoption system. (There was some incomplete thinking in that regard, inasmuch as most people doing a public adoption receive free legal counsel from the government.) Congress did not intend for step-parents to benefit from the law. Because step-parent adoptions are not eligible for the credit, some couples who are contemplating marriage choose to complete an adoption by one of them of the children born to the other before the marriage so that they can take the credit.

Can Gay Couples Use This Credit?

There is a largely academic question as to whether the adoption tax credit may properly be taken by unmarried gay and lesbian couples doing second parent adoptions. As noted above, the adoption tax credit law specifies that step parents cannot take the credit. Because second-parent adoptions were created by the courts based on step-parent adoption law, there is an inference that second parent adoptions should not result in use of the credit. Moreover, if the ban on the use of the credit for step parent adoptions is a reflection of federal policy, then likewise federal policy would not permit the credit to be used for step-parent adoptions.

What if the Adopting Parent Doesn't Work?

Another interesting issue arises sometimes in which the adopting parent has no income, and therefore no income tax against which to apply the tax credit. While the tax credit is a refundable credit during 2010 and 2011 (and therefore you do not need to owe any taxes in order to take the credit), it remains a problem for nonworking spouses.

Because opposite-sex married couples can file taxes jointly, this problem is largely limited to same-sex couples.

Warning: When a non-working spouse is adopting her partner’s child, it is likely that the adoption tax credit cannot be used without special planning in advance! Only the parent who is adopting the child can take the tax credit. If the biological parent (the non-adopting parent) pays for the adoption expenses, she will not be able to take the credit and nor will the adopting parent. The Internal Revenue Service takes the view that only the adopting parent can take the credit.

So what should you do if you are in this situation? It would be best by far for the adopting parent to write the checks that pay the adoption expenses. The adopting parent should open his or her own checking account and, if necessary, borrow money from a parent or friend, to pay adoption expenses.

In cases in which borrowing to pay the expenses is absolutely impossible, one might argue that if the non-adopting parent pays for the adoption, it would be considered a “deemed gift” to the adopting parent. However, that argument might not be accepted by the Service and is not recommended.

This concern is heightened by the fact now that the adoption tax credit is now a refundable credit. Therefore, because there is a dramatically increased risk of fraud any time there is a refundable tax credits, there is a far greater likelihood that the IRS will be auditing claims for the adoption tax credit. Because of the close scrutiny that the credit is likely to receive, it is important for families taking the credit to use special care to do so correctly.