Despite the adverse effect that the Defense of Marriage Act has on millions of LGBT people, there is one instance in which it helps. That instance is the availability of the Adoption Tax Credit to those who adopt their partner’s children. This of course only applies to those living in states that allow second-parent adoptions; but still, this one bit of law provides a benefit that would be otherwise unavailable if same-sex marriage was federally recognized. Let me explain.
The Adoption Credit is intended to provide financial relief and assistance to those who adopt children who do not already have a parent. For this reason, there is an exception rule that says that a taxpayer does not qualify for the credit if they are adopting the child of their spouse. There’s that word again, only this time, it’s a good thing. Because the word “spouse” is used, RDPs are eligible for the credit when adopting a partner’s child. After all, we’ve been told time and again that partner’s are not spouses. Period. For once, the rigid federal definition of marriage provides a benefit to LGBT people instead of harming them.
The Adoption Credit has been around for some time, at least as far back as 1996 when Bill Clinton signed the Small Business Job Protection Act. The credit was then created specifically to benefit those adopting special needs children. Over the years, the character of the credit has changed as various provisions have been passed and have expired. Perhaps the biggest moment in the history of the Adoption Credit was in 2010 when President Obama signed the landmark Affordable Care Act. In addition to increasing the amount of the credit to roughly $13,000 per child, up from Clinton’s $5,000, the act also made the credit refundable.
Tax credits are either refundable or non-refundable and most are non-refundable. The distinction is significant. A non-refundable credit will reduce any tax owed to zero, but not below. A refundable credit is one that will reduce your tax to zero and then refund you any excess. So, if you have a $1,000 non-refundable credit and $800 tax owed, you end up with zero tax and zero refund. If you have a $1,000 refundable credit and $800 tax owed, you will receive a $200 refund.
Sadly, the refundable character of the credit is set to expire for the 2012 tax year. As it stands now, if there are no changes, the credit will still be available for all 2012 adoptions but will be non-refundable. In 2013 it may be non-refundable and only apply to special needs adoptions. Although these attributes of the credit are scheduled to expire, President Obama has already once attempted to make changes. Unfortunately, the attempt failed as it was wrapped up in his ardently defeated budget proposal. The changes would have made the credit refundable for 2012/2013 and permanently available as non-refundable for all adoptions thereafter.
What happens with the Adoption Credit for the 2012 tax year remains to be seen. I expect tax law changes through early 2013, as is typical. Still, if you are planning to adopt your partner’s child, 2012 may be the year to consider it.