An adoption tax credit is tax credit offered to adoptive parents to encourage adoption,
Section 36C of the United States Internal Revenue code offers a credit for “qualified adoption expenses” paid or incurred by individual taxpayers.The credit is now refundable as of 2010, due to changes included in the Health Care and Education Reconciliation Act of 2010[2].
Qualified adoption expenses
Qualified expenses include: adoption fees, court costs, attorney fees,traveling expenses (including amounts spent for meals and lodging while away from home), and other expenses directly related to and for which the principal purpose is the legal adoption of an eligible child. The adoption tax credit is per child, thus the credit doubles when adopting two children in the same year. [3] It is also important to note that this is a “credit” not a mere “deduction.” [4] A tax credit is a dollar for dollar reduction of federal tax, not a reduction of taxable income, such as with a mortgage payment.
Parents who adopt a child with special needs (meaning a child who receives adoption assistance/adoption subsidy) can claim the full credit without documenting expenses. (See the IRS FAQs, paragraph 2 of question 1 athttp://www.irs.gov/individuals/article/0,,id=231663,00.html.) Parents will need to document the child has special needs, and this documentation can include the adoption assistance/adoption subsidy agreement, a letter from the state/county approving the child for adoption assistance/adoption subsidy, or a letter from the state/county child welfare agency stating that the child has special needs. See question 13 at the FAQs for information about documentation.
Limitations
To be eligible for the full tax credit, the adopting parent’s modified adjusted gross income cannot exceed $182,520. The taxable income may reach $222,520, but it is gradually phased out when in excess of $182,520.
The tax credit became refundable for 2010 and 2011. A refundable tax credit is one you get back regardless of what you owe or paid in taxes for the year.
Families who adopted from 2005 to 2009 may be able to benefit from the refundable credit because credits from those years can be carried forward until 2010. (Families who adopted in 2003 and 2004 may be able to take some limited advantage of the credit but will not benefit from refundability. Families who adopted earlier will not benefit from the credit if they did not take it already.)
For more detailed information, please visit the IRS site at:
http://www.irs.gov/taxtopics/tc607.html
You can also visit NACAC’s site for an explanation: