Will the Adoption Tax Credit Expire in 2012?

This week is shaping up to be Adoption Tax Credit week here at Creating a Family.
The radio show/podcast tomorrow will be on Filing for the Refundable Adoption Tax Credit in 2012 (for 2011 taxes).  We’ll talk with leading experts on what we learned from those who claimed the refundable adoption tax credit last year, and tell you what you can do to prevent the huge delays many adoptive families experienced. We also published our Top Ten Tips for Avoiding Delays When Filing for the Adoption Tax Credit, so check it out.

We’ve been swamped with emails and Facebook posts asking us what will happen to the adoption tax credit in 2012, 2013, and beyond.  Like it or not, the adoption tax credit is not and never has been a permanent part of the US tax code.  (See below a brief history of this credit from when it was first introduced in 1996 to present.)  Unless Congress passes legislation this year, as of Dec. 31, 2012, the Adoption Tax Credit will revert to a $6,000 nonrefundable credit for special needs adoptions only. To find out what Congress is up to on this credit and its chances for extension, I talked to someone truly in the know– the lobbyist in Washington DC working on the Adoption Tax Credit for the American Academy of Adoption Attorneys (AAAA).

You’ve heard me talk about AAAA before since I think they are the first place you should look when choosing an attorney that specializes in adoption.  What you may not know is that they are actively lobbying to make the Adoption Tax Credit permanent and refundable.  They also support allowing claims for the credit in the year adoption expenses are incurred, regardless of when the adoption is finalized.  I appreciate their allowing me to interview their top lobbyist on this credit.

Q:  The Adoption Tax Credit, as we know it, is set to expire on Dec. 31, 2012.  Has legislation been introduced that will extend the Adoption Tax Credit?

A:  The Adoption Tax Credit is NOT set to expire. But, after Dec. 31, 2012, it is set to revert to what the original 1996 legislation that created the adoption credit set it to be: a $6,000 nonrefundable credit for authorized expenses for special needs adoptions only. There are, at least, four bills that have been introduced this Congress to make the present, non-refundable, credit permanent.

Q: If there is more than one bill that has been introduced, what are the differences between them?

A: In order to understand the differences between the bills to make the Adoption Tax Credit permanent it is important to know that the current form of the Adoption Tax Credit was created in 2001 to modify the original 1996 Adoption Tax Credit statute.  But, the 2001 Adoption Tax Credit amendment was part of a much larger bill temporarily reducing a wide range of taxes. The larger tax cutting bill is known as “the Bush era tax cuts.”  Two current bills, S.336 and H.R.696, would make the Adoption Tax Credit permanent by removing the termination date (the “sunset” provision) for all the Bush era tax cuts. While two other Adoption Tax Credit bills, S.82 and H.R.184, would make the Adoption Tax Credit permanent by specifying that the termination date of the entire bigger tax cut bill does not apply to the Adoption Tax Credit.  In addition, S. 82 also says that the amount of the Adoption Tax Credit would be increased by $1000 and that the credit could be taken in the year authorized adoption expenses are made or incurred–instead of in the following year, as is now the case for adoptions that are not finalized in the year the expenses are incurred.

Q: I know you don’t have a crystal ball, but what are their chances for passing?

A:  I think that the chances of passing legislation extending the Adoption Tax Credit for some number of years or making it permanent, and possibly including the language of S. 82 (increasing the amount of the credit and allowing the credit to be taken in the year authorized adoption expenses are made or incurred) are excellent because adoption and the Adoption Tax Credit are popular in Congress.  But that will only happen, except for very extraordinary good luck, as part of the passage of some form of extension for the Bush era tax cuts–where there would not likely be a separate vote on the Adoption Tax Credit.  And, while the chances of extending the Bush era tax cuts passing in some form are reasonably good, it will be affected by how the Congress decides to deal with the federal deficit and the debt crisis.  Some want to extend all the Bush era tax cuts for everyone; some want to extend most of them, but only for families making less than $250,000 a year; some want to reform the tax code, with or without the Bush era tax cuts; and nearly everyone agrees that tax cuts or tax reform cannot be allowed to increase the national debt any further.  The Adoption Tax Credit is part of that big mix and, as of now, appears to be in good shape under almost all options.

Q: What are the odds that the Adoption Tax Credit will be made refundable again?

A: Not good, but something like what happened in 2009, when refundability for the Adoption Tax Credit for two years was passed as an amendment to the Patient Protection and Affordable Care Act, could happen again this year.  Right now, however, I think the odds in favor of that happening are low.

Q: What can the adoption community do to show our support for these bills?

A: I think the best thing to do for those who support extending or making the Adoption Tax Credit permanent, with or without refundability and with or without other modifications, is to write, email, phone, or meet with their Congressional delegation to let their members of Congress know that they want them to support continuation of the Adoption Tax Credit for all adopting parents and why.  [Creating a Family will be providing resources for these efforts in the near future as discussed below.]

Everyone in the adoption community has two U.S Senators and one Representative.  To find the name and contact information for your Senators and Representative, go to www.senate.gov and to www.house.gov.  Supporters of the Adoption Tax Credit can express support for one or more of the bills I’ve mentioned or they can describe the kind of Adoption Tax Credit they want to see passed by Congress this year.  If they are supporting one of the introduced bills they should ask Senators to “cosponsor” only the bills beginning with “S.” and ask Congressmen or Congresswomen to “cosponsor” only the bills beginning with “H.R.”  Personal stories of how the Adoption Tax Credit has or will help their constituents become parents are the best form of lobbying on this issue, and the more members of Congress who hear from their constituents about the need to continue the Adoption Tax Credit the better.

Q: There are many petitions being circulated right now in support for the Adoption Tax Credit being extended.  How can we tell which ones are “good”?

A: When dealing with the Congress a personal letter to your own Congressional delegation (both Senators and your House Representative), is almost always better and more effective than signing a petition.  To be affective in Congress, petitions must be from the constituents of each individual member of Congress–communications from non-constituents are politely, or not so politely, ignored most of the time.  The names on the petition must be verifiable.  The petition must be correct in its statement of the facts and the law–leaving facts and the law out of a petition are better than including them in error.  If the basis for someone’s signing a petition is questionable, the petition losses effectiveness.  And, finally, don’t “demand” anything in a petition to members of Congress.  Members of Congress are elected to represent all of their constituents as best as they can, and “demanding” that they represent only your interests on this issue is counterproductive–“urge,” “request” or otherwise persuade them to support your views. [Again, see below for what we’ll be organizing to advocate for an extension of this credit.]

Brief History of the Adoption Tax Credit (with thanks to the National Council for Adoption.)

• Although several different bills have been introduced to establish the adoption tax credit or make it a permanent part of the U.S. tax code, Congress has never passed legislation specific to the credit itself. Instead, the adoption tax credit has been extended every year since its initial passage as part of the Small Business Job Protection Act of 1996.
• The Small Business Job Protection Act established a nonrefundable maximum tax credit of $6,000 for parents that had adopted children with special needs, and a nonrefundable tax credit of $5,000 for all other adoptive parents, both of which went into effect in 1997. The $5,000 non-special needs adoption tax credit for eligible income-qualifying parents was set to expire on December 31, 2001.
• In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act, which raised the adoption tax credit to $10,000 for all adoptions, indexed the maximum allowable credit for inflation, and made the credit for special needs adoptions permanent. The tax credit for non-special needs adoptions was set to expire on December 31, 2010.
• In March 2010, the adoption tax credit was included in the Health Care and Education Reconciliation Act (an act amending the Patient Protection and Affordable Care Act), delaying its sunset until December 31, 2011. This increased the maximum credit (indexed for inflation) to $13,170 per eligible child and also made the credit refundable for tax years 2010 and 2011, which allowed families to receive the full benefit during a single tax year regardless of taxes due that year.
• In December 2010, the Tax Relief Act extended the adoption tax credit through tax year 2012; for this year, the credit is once again nonrefundable.
• The current maximum allowable adoption tax credit is $13,360, and is set to sunset on December 31, 2012. If it is allowed to expire, the law will revert back to a maximum tax credit of $6,000 for parents adopting children with special needs. There will be no adoption tax credit available for all other adoptive parents.

Creating a Family will provide draft letters and contact information in the near future and will continue to lead the way in educating adoptive parents on what they can do to support the extension of the Adoption Tax Credit. We will notify you of this campaign via our weekly newsletter, so please sign up at the top left of this page.