One of the more significant tax credits that is available for 2012 to most taxpayers is the adoption tax credit. Taxpayers can claim up to $12,650 for each child they have adopted. The credit is intended to offset some or all of the costs associated with the adoption of a qualified child. To be eligible for the adoption credit, the taxpayer must adopt an eligible child and pay qualified adoption expenses out of their own pocket.

Our family has taken advantage of this adoption credit, and it can be very beneficial. It is important to keep in mind that this is one area of the tax law that frequently changes. The credit for 2012 is presently at a maximum of $12,560. However, based on current tax laws, this credit will revert to $5,000 or $6,000 for a special needs child, beginning in 2013. In addition, the current credit is non-refundable and any unused credit is carried forward. For 2010 and 2011, this credit previously was a fully refundable tax credit. A child must be age 17 or younger or a child of any age who is a U.S. citizen or resident alien and who is physically or mentally incapable of caring for himself or herself to qualify for the adoption tax credit. Qualified adoption expenses include any and all costs directly related to the adoption that are necessary and proper expenses. These expenses can include adoption fees, legal fees, court costs and travel expenses.

If expenses were incurred for a failed adoption these expenses may qualify if the expenses related to efforts to adopt a U.S. citizen or resident child. The credit cannot be claimed for the adoption of a foreign child unless the adoption becomes final.

The timing of when the credit is taken varies depending on if the adoption is a foreign or domestic adoption and if the adoption is successful or not. All expenses can be taken once the adoption is finalized.

If you adopt a child with special needs you may be eligible for the entire tax credit regardless of the expenses incurred once the special-needs adoption has been finalized. A child with special needs is defined as a U.S. citizen or resident determined by a state to be unlikely to be adopted unless adoption assistance is provided because of the child's age, ethnic background, medical condition, membership in a minority group or sibling group or some other specific reason. The state makes the determination if the child is considered a special-needs child and you will know this prior to completing the adoption.

In addition to the federal tax credit the state of Ohio also has a tax credit available for up to $1,500 per child adopted. You can claim a credit against your state income tax if you adopted a minor child (younger than 18) during the tax year. This is a one-time credit per child. Any unused amounts can be carried forward for up to two years. The adoption must be final and recognizable under Ohio law in the year for which you first claim the credit.

There are specific income guidelines and other important factors that could affect the tax credit that you are eligible for. Some employers have a policy to reimburse a portion of adoption expenses, and this could affect your eligible benefit as well. Your tax adviser should be working with you on your specific situation to help you more effectively reduce your overall tax burden and maximize any credits that are available for you.