Tag Archives: adoption tax credit

DOMA is Dead – To Wed or Not to Wed; that is the Question

28 Sunday Jul 2013

Posted by in Legislation, Marriage, RDP Tax Returns, Taxes

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With the fall of DOMA has come a rush of same-sex couples (SSCs) converting their partnerships into marriages.   It is an emotional time, especially for those who have waited for over thirty years to make that change.  I have been to three weddings since the fall of DOMA and have five more between now and the first week of September. Put simply, it is inspiring and I am proud of these couples.  Despite the pride and emotion we are all feeling, though, I urge all couples to proceed with caution.  The right to marry, and to be recognized as a spouse, comes with changes that are worth consideration.

The media has been quick to discuss a few of the enormous benefits of marriage, particularly in the context of health, retirement and Social Security benefits.  There has even been the occasional reference to the presumed right to file as married filing jointly (MFJ) in 2013. However, there are still questions on how, and to whom, these changes will be applied.

Despite the IRS’ immediate promise to “move swiftly,” they have not yet issued any statements about how they will implement the Supreme Court decision. We can be confident that the IRS will allow SSCs to file jointly if they have a valid marriage license by the end of 2013. The question then is what will be considered a valid marriage license. The answer hinges on whether the IRS will use the state of domicile or the state of marriage in determining who has a valid marriage license. While we wait for the IRS to make an official statement, the more pressing question for many is whether or not to get married at all, and if so, when.  Emotion and celebration aside, the tax implications of marrying in 2013 are significant.

The ability to file MFJ will not be beneficial across the board. Some couples will realize a benefit in their total income tax and others will not.  Generally, if there is only one earner, MFJ status will be financially beneficial.  Others will experience what is known as the “marriage penalty” and end up with a higher tax bill when filing MFJ. This usually occurs when each spouse is an earner and the combining of income pushes the couple into a higher tax bracket.

The combining of incomes may also push many couples to an adjusted gross income (AGI) level that excludes them from tax deductions and credits that they have been able to claim in the past. For example, in 2012, many single taxpayers were eligible for the Child Tax Credit as long as their AGI was below $75,000, the beginning phase-out amount for a single taxpayer. If in an RDP couple each partner had a child and each partner had an AGI of $60,000, it’s possible that they could each claim the credit.  The 2012 AGI phase-out for married taxpayers began at $110,000. In this example, if the couple was married, their AGI would be $120,000 and they would only be eligible for a reduced credit or, in some cases, none at all. Eligibility for many deductions and credits are determined by AGI and, unfortunately, the MFJ phase-out amounts are not equal to double the single amounts.

It is important to remember, too, that some of the discriminatory tax laws actually benefit unmarried couples. Perhaps the most significant is the adoption credit. My earlier post, The Adoption Tax Credit – One Good Thing the Defense of Marriage Act did for Registered Domestic Partners, goes into the details of why registered domestic partners benefit from the adoption credit in a way that spouses do not.    If you are planning on adopting a child, and are not yet married, you may want to consider completing the adoption in 2013. If the potential tax benefit of the adoption credit exceeds the combined benefit from other changes, it may behoove you to adopt in 2013 and marry in 2014.

No matter when you decide to tie the knot, it is important to be prepared.  A quick review of your tax situation can give you the information you need to be ready for the changes to come.  A small amount of planning can go a long way.

The Adoption Tax Credit – One Good Thing the Defense of Marriage Act did for Registered Domestic Partners

31 Thursday May 2012

Posted by in RDP Tax Returns, Taxes

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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.