Adoption Tax Credit to Expire at the End of 2010

Yet another of the coming tax increases you’ve got to be aware of is the elimination of the Adoption Tax credit.  This credit came about originally as a part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA 2001) and was expanded with the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA 2003).  As originally written, this credit is set to expire on December 31, 2010.

The Credit Today

Under today’s law, a family who adopts an eligible child can claim a credit of up to $12,150 and further exclude up to $12,150 (2009 figures) in income for the expenses associated with the adoption.  For 2010, the amounts will be adjusted slightly to $12,170 for the credit and exclusion.  The credit and exclusion begin phasing out for a taxpayer with modified Adjusted Gross Income (MAGI) above $182,520 and is eliminated when the MAGI is $222,520 or more.

For a family with a taxable income of $80,000 before the credits, this adoption credit can mean as much as a $15,000 difference in tax – which can be quite meaningful, given the extraordinary costs associated with adoption.

Beginning in 2011

Unless something changes, the current adoption credit is set to expire at the end of 2010.  So beginning in 2011, there is only an adoption credit available if the child being adopted has special needs.  The credit is expected to maintain the current levels, with inflation adjustments.

The good news is that there are rumblings of rumor that Congress will extend the full adoption credit indefinitely – but we’ll just take a wait and see approach on that.  Given the relatively liberal MAGI caps on this credit, I would expect to see some sort of “adjustment” before the credit is extended beyond 2010; after all, anyone making over $200,000 is one of the filthy rich, don’t you know?

Photo by NACAC

I can learn from you, you can learn from me - please leave your comments and links!

Jim Blankenship, CFP®, EA, is an expert in personal retirement, IRAs, and tax issues, with more than 20 years of experience in the industry.  . Read more from this author