Tax Benefits for Families: Adoption

^Pr^ep^ar^{ed f}^o^r^M^e^m^b^ers^an^d^Com^mⁱ^t^t^ees^of^C^ong^r^e^ss

The federal government provides assistance for the adoption of children through federal grants to
states and through the tax code. Although federal assistance programs for adoption focus
primarily on children adopted out of foster care, federal adoption tax provisions are available for
all adoptions (except for adoptions of stepchildren).
Congress created federal tax assistance for adoption by enacting the Small Business and Job
Protection Act of 1996 (P.L. 104-188). The act added tax incentives for adoption to the existing
federal adoption assistance grant programs by creating a tax credit and an income tax exclusion of
up to $5,000 per adoption and $6,000 per adoption of a special needs child. The Economic
Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, P.L. 107-16) increased qualified
expenses for the credit (and the income tax exclusion) to $10,000 (indexed for inflation), but with
a sunset period. Beginning in 2011, the prior law limits of $5,000 and $6,000 will become
effective again.
The tax credit and the income tax exclusion significantly limit who may benefit from the tax
provisions. Both provisions are subject to a phase-out rule (which creates an income cap), and the
tax credit is nonrefundable (which creates a minimum income level for using the credit). These
provisions limit the number of taxpayers who benefit from the credit. As a result, in tax year
2006, very few families with an adjusted gross income of less than $30,000, or with an adjusted
gross income of $200,000 or more, claimed the credit. In tax year 2006, approximately 93,400 tax
returns, or .07% of all tax returns, included a claim for the adoption tax credit, with a total credit
value claimed of $301.9 million.
Policy issues associated with the tax provisions are the limited availability of the credit resulting
from the phase-out rule and nonrefundablity of the credit, more generous provisions for domestic
adoptions and for adoptions of special needs children, and whether the tax system is the most
efficient means of providing federal assistance for adoption.
In the 110^th Congress, legislation was introduced (H.R. 273, H.R. 471, H.R. 3758,S. 561, and S.
3079) that would have repealed the EGTRRA sunset provision as it relates to the adoption tax
provisions. H.R. 1074, H.R. 3192, H.R. 7091, and S. 2407, would have increased the maximum
qualified expenses from $10,000 to $15,000 (with an inflation adjustment) and made the adoption
tax credit refundable. H.R. 4313 would have provided an additional $2,000 of tax credit for
adopting an older child. This report outlines the tax benefits for adoption, examines the associated
policy issues, and provides a legislative history of the tax provisions for adoption. It will be
updated as warranted by legislative activity.

Scope of Adoption...........................................................................................................................1
Domestic Public Agency Adoptions..........................................................................................1
Domestic Private Adoptions......................................................................................................2
Intercountry Adoptions..............................................................................................................2
Overview of the Tax Credit and Income Tax Exclusion..................................................................2
The Adoption Tax Credit...........................................................................................................3
Qualifying Expenses...........................................................................................................3
Special Rules for Special Needs Children..........................................................................4
Special Rules for Intercountry Adoptions...........................................................................5
Limitati ons .................................................................................................................... ...... 6
Claiming the Credit.............................................................................................................6
Income Tax Exclusion for Employer Adoption Assistance.......................................................7
Policy Issues....................................................................................................................................8
Phaseout (Income Limitation)...................................................................................................8
Nonrefundabi lity ....................................................................................................................... 8
Impact of the Phaseout (Income Limit) and Nonrefundablity..................................................9
Federal/State Subsidies Versus Tax Incentives.........................................................................11
Special Needs Children Versus Non-special Needs Children..................................................11
Domestic Adoptions Versus Intercountry Adoptions..............................................................12
EGT RRA ......................................................................................................................... ........ 12
Legislative History........................................................................................................................12
The Small Business and Job Protection Act of 1996 (P.L. 104-188)......................................13
The Taxpayer Relief Act of 1997 (P.L. 105-34)......................................................................13
IRS Restructuring and Reform Act of 1998 (P.L. 105-206)....................................................13
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGGTRA, P.L.
107-16) ................................................................................................................................. 13
The Job Creation and Workers Assistance Act of 2002..........................................................14
Legislation in the 110^th Congress..................................................................................................14
Table 1. Examples of Qualifying and Non-Qualifying Expenses....................................................4
Table 2. When Qualified Expenses Are Eligible: Domestic and Intercountry Adoptions..............5
Table 3. Utilization of the Adoption Tax Credit, Tax Year 2004.....................................................9
Author Contact Information..........................................................................................................14

tates have paramount responsibility in setting policy to govern the process of child
adoption. Nonetheless, the federal government plays a significant—though indirect—role
in supporting adoption through grants to states that provide both one-time and ongoing S

subsidies to parents of adoptive children with special needs and through tax benefits that help
offset the costs of adopting a child. This report focuses primarily on the latter—the federal
adoption tax credit and income tax exclusion for employer-provided adoption assistance.

There are several types of adoption, including domestic public agency adoption, domestic private
adoption, and intercountry adoption. With regard to each of these types of adoption, the
Department of Health and Human Services (HHS) collects data on children adopted with the
involvement of state child welfare agencies, and the Department of State records the number of
intercountry adoptions through its visa reporting system. However, statistics on private adoptions
are the least reliable or consistent, because private agencies and individuals who facilitate
independent adoptions are not required to report data to either state or federal agencies.
The most recent data on all types of adoption, collected by the National Center for State Courts
(NCSC), indicate than an estimated 127,000 children were adopted in 2001. This is
approximately the same estimated number of adoptions as in 1992 and somewhat higher than the ¹
estimated 118,000 adoptions in 1987. According to NCSC data, of adoptions in 2001, an
estimated 46% were private (including tribal and kinship, such as stepparent), 39% were
intercountry, and 15% were public agency adoptions. However, these percentages differ greatly
from 1992, when an estimated 77% of adoptions were private, 5% were intercountry, and 18%
were public agency adoptions.
The tax provisions described in this report cover all types of adoption, except for adoptions by
stepparents. According to data for 1992 (the most recent available), the majority of private ²
adoptions (or 42% of total adoptions) were by stepparents.
Children in state foster care are typically placed in either foster family homes, relative foster
homes, group homes, or institutional settings such as hospitals or residential treatment centers. On
the last day of FY2006, approximately 510,000 children were in foster care and 129,000 were
“waiting” to be adopted. (Foster children waiting to be adopted include those who have a
permanency goal of adoption and/or those whose parental rights have been terminated.) During
FY2006, 51,000 children were adopted with the involvement of state child welfare agencies.

¹^De^pa^rtm^e^{nt of}^He^a^{lth a}^{nd H}^u^m^a^{n Se}^rv^ic^e^s^{(HHS), A}^d^mⁱ^nistra^tion^f^o^{r Childre}^{n a}ⁿ^d^Fa^m^ilie^{s, Childr}^e^{n’s Bure}^a^u^,
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^a^s^s^u^m^e^{d to be}^dom^e^s^tic^pr^iv^a^t^e^adop^tio^{n i}ⁿ^m^o^s^t^c^a^s^e^s^.

These numbers reflect a steady level over the past five years among children in foster care, those ³
awaiting adoption, and the number of children adopted in a given year.
Domestic private adoptions are facilitated by state-licensed private agencies or through
independent agreements in which an individual arranges for another party to adopt his or her ⁴
child. Like all adoptions, private adoptions are finalized by state or tribal courts, but data on
these adoptions are not systematically collected or reported. Therefore, national data on domestic
private adoptions are the least reliable or consistent. The most recent effort to count domestic
private adoptions was in 2001 when, as noted earlier, the National Center on State Courts
estimated them at 58,600 (or 46% of the estimated 127,000 adoptions of all kinds) adoptions. The
comparable estimate for FY1992 was 77% of the total number of adoptions (also estimated at

127,000 for that year), or 97,700 adoptions.

Intercountry (also called foreign or international) adoptions are adoptions of non-citizen or ⁵
resident children by families who are citizens or legal residents of the United States. In FY2007,
the Department of State reported issuing 19,613 immigrant visas to orphans entering the United
States. Issuance of such a visa is a prerequisite for intercountry adoption by a U.S. citizen, and the
number of such visas is a considered a good proxy for the number of such adoptions. The
comparable number of visas in FY2000 was 17,718; in FY1990, the number of such visas issued ⁶
was 7,093.

Adoption costs can exceed $40,000, depending on the type of adoption, with the following ⁷
ranges:
• Domestic public agency adoptions: $0 to $2,500.
• Domestic private adoptions: $5,000 to $40,000 (or more).

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⁶^Uⁿ^ite^d^Sta^t^e^s^D^e^pa^r^t^m^e^{nt of}^Sta^t^e^,^B^u^r^e^a^u^of^C^o^ns^ula^r^A^f^f^a^ir^s^,^O^r^phaⁿ^Vis^a^S^t^a^tis^tic^s^,^Immig^r^an^t^Vⁱ^sa^{s Issu}^ed^t^o
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⁷^Chil^{d W}^e^lf^a^r^e^Inf^o^r^m^a^{tion G}^a^te^w^a^y^,^Co^{sts o}^f^A^d^op^ting^:^A^Fa^{ctsheet fo}^{r Fa}^milⁱ^es^,²⁰⁰⁴^,^avai^l^a^b^l^{e at}
^http:^//www^.c^hildw^e^l^f^a^r^e^.^g^o^v^/^pub^s/s_c^o^st/ⁱ^nde^x^.^c^f^m^.

• Intercountry adoptions: $7,000 to $30,000 (or more).
The federal adoption tax credit and income tax exclusion (for employer-provided adoption ⁸
expenses) are intended to help offset some of the costs of adoption for taxpayers.
Both the credit and the income tax exclusion are subject to the same phaseout (or income
limitation) and the same maximum qualified expenses that can be claimed per adoption. Both tax
provisions use the same definitions of qualified expenses, eligible child and special needs child,
and both have the same special rules for intercountry adoptions.
The Adoption Tax Credit is available to taxpayers who have either initiated or completed the ⁹
adoption process. Unlike many other tax credits, the adoption tax credit has a 100% credit rate—
the amount of the credit is the same as the amount of qualified expenses. The dollar limit for ¹⁰
qualified expenses is adjusted annually for inflation. In tax year 2008, the dollar limit for
qualified expenses is $11,650.
The most recent public data available on the use of the adoption tax credit by the type of adoption
are for tax year 2004. In tax year 2004, taxpayers claimed adoption tax benefits for the adoption
of 12,432 children with special needs, or about 18% of all adoptions for which tax benefits were
claimed. In contrast, in that same year, taxpayers adopting internationally claimed some part of
the tax credit for 29,296 adoptions, representing about 33.7% of the adoptions for which tax ¹¹
benefits were claimed. In contrast, in tax year 1998, tax benefits were claimed for the adoption
of 50,400 individuals including 4,700 special needs children, and 14,300 intercounty adoptions.
Although the total number of adoptions for which tax benefits are claimed has increased, the
growth for special needs children is significant.
A taxpayer can claim only expenses that are necessary and reasonable and directly related to the ¹²
adoption of an eligible child. The term “eligible child” refers to children under age 18 and to ¹³
individuals who are physically or mentally incapable of taking care of themselves. Qualified

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^Tax^.
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^On^{e exa}^m^p^l^{e o}^f^an^exp^eⁿ^s^{e i}ⁿ^cu^rred^at^t^h^e^b^e^giⁿⁿⁱⁿ^g^o^f^t^h^{e p}^r^o^{cess i}^s^ad^o^p^tⁱ^oⁿ^f^ees.^Du^riⁿ^g^t^h^e^p^r^ocess,^t^h^{e t}^a^xp^a^y^er
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^m^a^y^inc^u^{r qua}^lif^ie^{d e}^x^pe^nse^s^f^o^{r the}^fⁱ^na^{l le}^g^a^{l fe}^e^s^.
¹⁰^In^st^at^ut^e,^t^h^{e l}ⁱ^mⁱ^t^a^tⁱ^oⁿⁱ^s^$¹⁰^,⁰⁰⁰^adj^u^st^{ed f}^o^{r i}ⁿ^f^l^atⁱ^oⁿ^each^y^e^a^r^b^e^giⁿⁿⁱⁿ^g^wⁱ^t^h^t^a^{x year}^2003.
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^a^dopt^io^{n ta}^x^c^r^e^d^{it r}^e^f^l^e^c^t^the^c^r^e^d^{it ta}^k^e^{n t}^h^a^t^ta^x^y^e^a^r^{. T}^a^x^p^ay^e^r^s^m^a^y^{not be}^a^b^le^t^o^us^e^the^f^u^{ll a}^m^oun^{t of}^the
^a^dopt^io^{n ta}^x^c^r^e^d^{it i}ⁿ^the^ta^x^y^e^a^r^{in w}^h^ic^{h t}^h^e^y^inc^u^r^qua^lif^ie^{d a}^d^o^p^tio^{n e}^x^pe^ns^e^s^{. T}^h^e^y^ca^{n c}^a^r^r^y^ove^r^aⁿ^y^unus^e^d
^a^dopt^io^{n ta}^x^c^r^e^d^{it t}^o^f^u^tur^e^ta^x^y^e^a^r^s⁽^f^or^{up to f}ⁱ^v^e^ta^x^y^e^a^r^s⁾^.
¹²^In^tern^{al Rev}^eⁿ^u^e^C^o^d^e^(IRC)^§²³^(d⁾⁽¹^)(A^).
¹³^I^R^C^§²³⁽^d)⁽²⁾^.

expenses do not include those that violate federal or state law, are incurred in carrying out any
surrogate parenting agreement, or are for the adoption of a child who is the child of the taxpayer’s ¹⁴
spouse (i.e., a stepchild).
For domestic adoptions, taxpayers may claim the adoption tax credit in the tax year that they
incur the qualifying expense, without regard to the status of the adoption. This means that even if
an adoption is never finalized, the taxpayer may claim the adoption tax credit for the qualified
expenses associated with the adoption. For intercountry adoptions, the adoption must be finalized
before the taxpayer can claim the adoption tax credit for any qualifying expenses. Specific types
of expenses eligible for the credit are not listed in the Internal Revenue Code (IRC). Table 1
shows examples of qualified expenses provided by Internal Revenue Service (IRS) publications.
Table 1. Examples of Qualifying and Non-Qualifying Expenses
^{Qualifying Expenses}^{Non-Qualifying}^Expenses
^{—court costs}^—expe^{nses already covered}^{by a}^{ssistance th}^rough^{state, federal,}
^{—attorney fees}^{employer or other}^programs
^{—adoption fees}^—expe^{nses t}^{hat violate state or f}^{ederal law}
^{—travel expe}^nses^—expe^{nses inc}^urr^{ed for an adop}^{tion carried by a s}^urrogate
^{—re-adoption expen}^{ses in t}^{he ca}^{se of}^—expe^{nses inc}^urr^ed^{for adopting}^{a spouse’s c}^hild
^intercount^{ry (foreign) adoptions}^—expe^{nses paid}^{before 19}⁹⁷
^{—other costs directly related to the adoption}
^Source:^Int^{ernal Reve}^{nue Servic}^{e (IRS) Publication 968 (for ta}^{x y}^{ear 2}⁰⁰⁴^ret^urns).
^Note:^{These lists are not exha}^us^{tive but are}^{intended to illustrate}^{what are}^{considered qualifying e}^xpe^{nses a}^nd
^{non-qualifying e}^xpe^nses.
Beginning with tax year 2003,¹⁵ a taxpayer claiming the credit for the adoption of a special needs
child is assumed to have incurred the maximum amount of qualifying expenses and may claim ¹⁶
the full credit. Many children adopted from the public child welfare system meet the definition
of special needs for the adoption tax credit. A child is defined as a special needs child if the
child’s state of residence determines that
• the child cannot, or should not, be returned to the home of his or her birth
parents;
• there is a specific factor or condition which leads to the reasonable conclusion
that the child will not be adopted without assistance provided to the adoptive
parents;
• and the child is a citizen or legal resident of the United States.

¹⁴^{IRC §}²³⁽^d⁾⁽¹^)(B)^an^d^{IRC §}²³⁽^d⁾⁽¹^)(C).
¹⁵^P^r^ior^to^ta^x^y^e^a^r^2003,^a^ta^x^p^a^y^e^r^c^l^aⁱ^mⁱ^ng^the^a^dopti^on^ta^x^c^r^e^d^{it (}^o^r^usⁱⁿ^g^theⁱⁿ^c^o^m^e^ta^x^ex^c^l^us^ion⁾^f^o^r^the
^a^dopt^io^{n of}^a^s^p^e^cⁱ^a^l^ne^e^d^s^c^h^il^d^ha^{d t}^o^d^o^c^u^m^e^{nt the}^q^u^a^lif^yⁱ^ng^e^x^pe^ns^e^s^.
¹⁶^I^R^C^§²³⁽^d)⁽³⁾

Examples of specific factors (or conditions) that may be considered in determining whether a
child is a special needs child include ethnicity; minority status; age; status as part of a sibling ¹⁷
group; mental, emotional or physical handicap; and other medical conditions. The definition of
“special needs” for the adoption tax credit matches the definition provided in Section 473 (Title ¹⁸
IV-E) of the Social Security Act for the federal Adoption Assistance Program.
For purposes of the tax code, a child must be a legal resident or citizen to qualify as a special ¹⁹
needs child; therefore, no intercountry adoption meets the tax code’s definition of special needs.
Although a taxpayer may not claim a total adoption tax credit of more than $11,650 in tax year
2008 for any single adoption, the taxpayer may claim the adoption tax credit for a single adoption
in more than one tax year, depending on when the adoption expenses are paid and whether the
adoption is domestic or intercountry. For a domestic adoption, the qualifying expenses may be
claimed for the adoption tax credit prior to and during the adoption process, even if the adoption
is not finalized; for an intercountry adoption, the adoption must be finalized before a taxpayer can ²⁰
claim the credit for the adoption expenses. Therefore, a taxpayer adopting a foreign child may
only claim the credit beginning in the tax year in which the adoption is finalized. Table 2 shows
the relationship between the tax year in which expenses are paid and the tax year when those
expenses are eligible for the adoption tax credit, based on the type of adoption.
Table 2. When Qualified Expenses Are Eligible:
Domestic and Intercountry Adoptions
^{When Taxpayer May Claim}^Expenses
^{When the Qualified Expenses}
^{Are Inc}^urred^{Domestic Adoptions}^Intercountry^Ado^ptions
^{Tax years}^{before t}^{he tax}^{year in}^{Tax year in w}^{hich e}^xpe^{nses a}^re^{Tax year in w}^{hich t}^{he adoption is}
^{which th}^{e adoption is finalized}^{incurred (or later ta}^{x year}^s)^{finalized (}^{or later tax years)}
^{Tax year in w}^{hich t}^{he adoption is}^{Tax year in w}^{hich t}^{he adoption is}^{Tax year in w}^{hich t}^{he adoption is}
^finalized^{finalized (}^{or later tax years)}^{finalized (}^{or later tax years)}
^{Tax years afte}^{r th}^{e tax}^{year in w}^hich^{Tax year in w}^{hich e}^xpe^{nses a}^re^{Tax year in w}^{hich t}^{he ex}^pe^{nses a}^re
^{the adoption is finalized}^{incurred (or later ta}^{x year}^s)^{incurred (or later ta}^{x year}^s)
^Source:^In^{formation taken}^from^{IRS Publication 968 (for ta}^{x yea}^r²⁰⁰^{4 r}^etur^ns).

¹⁷^Ibid^.
¹⁸^For^m^o^r^e^inf^o^r^m^a^{tion o}ⁿ^f^e^de^r^a^{l a}^dopt^io^{n a}^s^sⁱ^s^t^aⁿ^c^e^pr^og^r^a^m^s^{, s}^e^eC^R^S^R^e^por^t^R^L³¹²^42,^C^hⁱ^l^{d W}^e^l^f^ar^e^:^Fe^de^r^a^l
^Pr^ogr^am^Re^quir^e^m^e^nts^f^o^r^S^t^ate^s^{, by}^Em^ilie^Stoltz^f^u^s.
¹⁹^{IRC §}²³⁽^d⁾⁽²^)(C)
²⁰^I^R^C^§²³⁽^e⁾^.

In addition to the maximum amount for qualified expenses, two other significant limitations are
related to the credit. The first is the phaseout of the credit, or maximum income limitation. The ²¹
full credit can only be claimed by families with an adjusted gross income (AGI) equal to or less ²²
than $174,730 in tax year 2008. For taxpayers with incomes above this threshold amount, their
credit is reduced by the ratio of their income above the threshold to $40,000. For example, a
taxpayer with an AGI of $180,000 would have their credit reduced by 13.2% (calculated as
$180,000 - $174,730, or $5,270 divided by $40,000, equals 13.2%). For taxpayers with an AGI ²³
$40,000 or more above the threshold, the credit is reduced to zero ($0).
The second limitation is that the credit is nonrefundable, and a nonrefundable tax credit can only ²⁴
offset tax liability. For the adoption tax credit, the actual amount of the credit that may be taken
is based on tax liability remaining after (almost all) other nonrefundable tax credits have been
applied—the foreign tax credit, credit for child and dependant care expenses, credit for the elderly ²⁵
and disabled, education credits, retirement savings contribution credit, and the child tax credit.
Therefore, taxpayers with a tax liability that is significantly lower than their qualified adoption
expenses (after the other nonrefundable tax credits) receive only a limited benefit from the tax
credit. If the qualified expenses exceed the taxpayer’s tax liability, the tax liability will be reduced
to zero, but the taxpayer will not receive a refund. The lower the taxpayer’s tax liability, the lower
the benefit from the credit. There is, however, a carryover provision that allows a taxpayer to ²⁶
carry the credit forward for up to five years.
To claim the adoption tax credit, a taxpayer must fill out IRS Form 8839.²⁷ Depending on the
taxpayer’s marital status, the filing requirements may vary. Generally, a married couple must file ²⁸
a joint tax return to claim the adoption tax credit. If two taxpayers (not married to each other)
wish to claim the adoption tax credit, they may split the qualified expenses for the adoption tax

²¹^A^d^juste^d^g^r^{oss inc}^o^m^e^{is tota}^{l ta}^x^a^ble^inc^o^m^e^af^te^r^s^t^a^t^utor^y^a^d^jus^t^m^e^nts^.^T^o^ta^{l ta}^x^a^ble^inc^o^m^e^doe^s^not^inc^l^u^d^e
^inc^o^m^e^tha^t^is^e^x^em^{pt f}^r^o^m^inc^o^m^e^ta^x^e^s⁽^s^uc^{h a}^s^v^e^t^e^r^a^ns^be^ne^fⁱ^t^s⁾^.^Sta^t^ut^or^y^a^d^jus^t^m^e^nts^r^e^duc^e^ta^x^a^ble^inc^o^m^e
^be^f^o^r^e^e^x^em^ptions^a^{nd a}ⁿ^y^s^t^a^nda^r^d^or^ite^mⁱ^z^e^d^de^duc^tio^ns^{. Ex}^a^m^ple^s^of^s^t^a^t^utor^y^a^d^jus^t^m^e^nts^a^r^e^He^a^{lth Sa}^vⁱ^ng^s
^A^c^c^ounts^,^I^R^A^de^duc^tⁱ^oⁿ^s^,^aⁿ^{d a}^l^im^on^y^pa^{id. T}^h^e^lim^ita^{tion is}^ba^s^e^{d on}^a^d^j^u^s^t^e^d^g^r^os^sⁱⁿ^c^o^m^e^w^{ithout r}^e^g^a^r^d^t^o^I^R^C
^Se^c^tions⁹¹^{1, 93}^{1, or}⁹³³^.
²²^{IRC §}²³⁽^b)(2)(A^{). T}^h^e^inc^o^m^e^lim^ita^{tion is $}¹⁵⁰^,0⁰⁰^a^d^juste^d^f^o^{r inf}^l^a^tion;^the^r^e^f^ore^,^theⁱⁿ^c^o^m^e^lim^{it in ta}^x^y^e^a^r
²⁰⁰^{8 is}^$1⁷⁴^,7^30.
²³^T^a^x^p^ay^e^r^s^w^{ith a}ⁿ^inc^o^m^e^of^$2^14,⁷³^{0 o}^r^m^o^r^e^{in ta}^x^y^e^a^r²⁰⁰^8.
²⁴^A^non-^r^e^f^unda^ble^ta^x^c^r^e^d^{it is}^a^t^a^x^c^r^e^d^{it tha}^t^c^aⁿⁿ^o^{t e}^x^ceed^{a tax}^p^a^y^e^{r’s tax}^liab^ility^.^Aⁿ^y^cred^{it am}^{ount “}^l^e^f^{t ov}^e^r^”
^(m^ore^thaⁿ^the^ta^x^p^a^y^e^{r’s ta}^x^lia^bility⁾^m^a^y^be^(de^p^e^nding^oⁿ^t^h^e^ta^x^c^r^e^d^{it) c}^a^rrie^d^ov^e^r^a^nd^use^dⁱⁿ^a^f^u^ture^ta^x^y^e^a^r^.
^W^{ith a}^r^e^f^unda^ble^ta^x^c^r^e^d^{it, s}^u^c^h^a^s^the^Ea^rⁿ^e^d^Iⁿ^c^o^m^e^T^a^x^C^r^e^d^{it, the}^ta^x^p^a^y^e^r^r^e^ce^iv^es^a^ta^x^r^e^f^{und f}^o^r^the^a^m^ount
^of^the^ta^x^c^r^e^d^{it in e}^x^c^e^{ss of}^ta^x^lia^bility^.
²⁵^I^R^C^§²³⁽^b)⁽⁴⁾^.
²⁶^{IRC T}^itle^26,^Se^c^tio^{n 2}³^(c^).
²⁷^I^R^{S I}ⁿ^s^t^r^u^c^tio^ns^f^o^r^For^m⁸⁸³⁹⁽^f^o^r^ta^x^y^e^a^r²⁰⁰⁵⁾^.
²⁸^I^b^id^{. I}^f^a^m^a^r^rⁱ^e^d^pe^r^s^on^ha^s^be^eⁿ^liv^ing^a^p^a^r^{t f}^r^om^his^or^he^r^s^p^o^u^s^e^f^o^r^m^o^r^e^thaⁿ^sⁱ^x^m^onths^of^the^ta^x^y^e^a^r^{, the}
^c^h^{ild t}^o^be^a^d^o^p^te^d^ha^{s liv}^e^d^w^ith^the^pe^rsoⁿ^f^o^{r m}^o^re^thaⁿ^six^m^oⁿ^t^{hs of}^the^ta^x^y^e^a^r^{, a}^{nd the}^pe^rsoⁿ^ha^{s pa}^id^m^o^re
^thaⁿ^one^-^h^a^l^f^of^the^a^d^opti^oⁿ^c^o^s^t^s^a^{nd t}^h^e^c^o^s^t^of^the^hom^e^{in w}^h^ic^{h the}^pe^r^s^{on a}^{nd t}^h^e^c^h^il^{d r}^e^sⁱ^de^,^the^m^a^r^rⁱ^e^d
^pe^rs^{on m}^a^y^c^l^aⁱ^m^the^a^dopti^on^ta^x^c^r^e^d^{it w}^h^eⁿ^f^iling^a^m^a^rrie^d^f^ili^ng^s^e^pa^ra^te^ta^x^re^turn.

credit (and therefore the adoption tax credit) by mutual agreement.²⁹ However, the total of
qualified expenses (and adoption tax credit) cannot exceed the maximum allowed under law
($11,650 in tax year 2008). Taxpayers must include the tax identification number (Social Security ³⁰
number) of the child they are adopting. Finally, taxpayers must keep all receipts and records of ³¹
expenses for reporting purposes.
Generally, the income tax exclusion for employer adoption assistance follows many of the same ³²
rules, applications, and limitations as the adoption tax credit. The maximum amount of qualified ³³
expenses that can be claimed is subject to the same dollar limitation as the tax credit. A
taxpayer’s eligibility for the income tax exclusion is also subject to the same income limitation ³⁴
(or phaseout) as the adoption credit. The income tax exclusion for employer-provided adoption
assistance follows the same definitions of special needs children, qualified expenses, and eligible
children. The special rules for intercountry adoptions and filing requirements of the adoption tax ³⁵
credit also apply to the income tax exclusion. Individuals can use both the adoption tax credit
and the income tax exclusion (if both are available to them), but cannot claim the same expenses ³⁶
for both tax provisions. Employer-provided adoption assistance must be provided through a
separate written plan for an adoption assistance program, which is generally available to all
employees. However, employers are restricted from offering the adoption assistance program to ³⁷
certain high-earning employees.
Unlike the adoption tax credit, employer adoption assistance programs act as income tax
exclusions. This means that an employee who has qualifying expenses covered through an
employer adoption assistance program (expenses paid for by the employer or through a
reimbursement program funded by the employer, employee, or both parties) does not have to ³⁸
include the value of the covered adoption expenses as income for federal income taxes.
Employer adoption assistance programs are a separate employee benefit and are provided by
direct payment of eligible expenses by the employer or the reimbursement of eligible expenses
through an account (usually administered by a third party) funded by the employee, employer, or

²⁹^Ib^id^.
³⁰^Ibid^.
³¹^Ib^id^.
³²^Aⁿ^inc^o^m^e^ta^x^e^x^c^l^{usion is a}^f^o^rm^o^f^inc^o^m^e^tha^t^{is not}^sub^j^e^c^t^to^ta^x^a^{tion. A}ⁿ^inc^o^m^e^ta^x^e^x^c^l^usio^{n is n}^o^rm^a^l^l^y^not
^r^e^por^te^{d f}^o^r^ta^x^p^u^r^p^os^e^s⁽ⁱ^.e^{., f}^e^de^r^a^{l inc}^o^m^e^ta^xe^s^a^nd/or^e^m^ploy^m^e^{nt ta}^x^e^s⁾^{. Ex}^am^ple^s^of^aⁿ^inc^o^m^e^ta^x^ex^c^l^us^ion
^a^r^e⁴⁰¹⁽^k⁾^c^o^ntrⁱ^buti^ons^a^{nd f}^r^ing^e^be^ne^f^its^{, w}^h^ic^{h a}^r^e^{not i}ⁿ^c^l^u^d^e^d^a^s^inc^o^m^e^f^o^r^f^e^de^r^a^{l inc}^o^m^e^taxe^s^a^nd/or
^em^ploy^m^e^{nt ta}^x^e^s⁽^S^oc^ia^{l Se}^c^u^rⁱ^t^y^a^{nd Me}^dic^a^r^e^ta^x^e^s⁾^{on a}^pe^r^s^oⁿ^’^s^w^a^ge^s^t^a^t^em^eⁿ^{t or}^W^-^{2 f}^o^r^m^{. T}^h^ey^m^a^y^,
^how^e^v^e^r^{, be}^r^e^por^te^{d s}^e^pa^r^a^te^ly^{on the}^f^o^r^m^f^o^r^inf^o^r^m^a^{tion p}^u^r^p^os^e^s^.
³³^I^R^C^§¹³⁷⁽^b)⁽¹⁾
³⁴^I^R^C^§¹³⁷⁽^b)⁽²⁾
³⁵^I^R^C^§¹³⁷⁽^e⁾
³⁶^I^R^C^§²³⁽³⁾⁽^A⁾
³⁷^I^R^C^§¹³⁷⁽^c⁾^{, a}ⁿ^{d I}^R^S^Pu^blic^a^tio^{n 1}⁵^-^B^,^Em^ploy^e^r^’^s^Tax^G^u^ide^to^Fr^inge^Be^ne^f^its^.^Du^rⁱⁿ^g^t^h^{e y}^ear,ⁿ^o^m^o^{re t}^h^an
^5%^of^a^{ll pa}^y^m^eⁿ^ts^m^a^de^by^the^adop^tioⁿ^pr^og^r^a^m^c^aⁿ^be^f^o^r^s^h^a^r^ehol^de^r^s^or^ow^ne^r^s⁽^o^r^theⁱ^r^s^p^o^u^s^e^s^or^de^pe^ndeⁿ^t^s⁾^.
^A^s^h^a^r^e^holde^r^or^ow^ne^r^is^de^fⁱ^ne^{d a}^s^s^o^m^e^one^w^{ho ow}^ns^5%^or^m^o^r^e^of^the^s^t^oc^k^,^c^a^p^ita^l,^or^pr^of^{it o}^f^the^bus^ine^s^s⁽^oⁿ
^an^y^d^a^y^o^f^t^h^{e year).}
³⁸^I^R^C^§1³⁷⁽^a⁾⁽¹⁾

both.³⁹ Employers may include an adoption assistance program based on reimbursement as part of
a cafeteria plan for employee benefits, and reduce an employee’s salary to pay for the benefit.
Companies may offer informational and referral benefits, direct payment or reimbursement of ⁴⁰
eligible expenses, paid leave benefits, or a combination of benefits for adoption.
According to the Department of Health and Human Services, a Hewitt Associates study found ⁴¹
that 39% of major U.S. companies offered adoption assistance as an employee benefit.
Employers sampled by Hewitt offered from $1,500 to $15,000, with an average of $3,879 in ⁴²
reimbursement of adoption expenses. Because an employer has discretion in the amount and
type of assistance offered for adoption, the income tax exclusion for employer-provided adoption
assistance may be more limited than the adoption tax credit in the types of eligible adoption
assistance.
Although employer-provided adoption assistance is excluded from federal income taxes, unlike
other flexible benefits such as child care, it is still subject to Social Security and Medicare taxes.

Several policy issues are associated with the federal adoption tax provisions, including the
limitations on the credit (the phaseout and nonrefundability), the rules for special needs children
and intercountry adoptions, the sunset of the EGTRRA changes, and whether the tax provisions
are the best way to provide adoption assistance.
To claim the full value of the adoption tax credit, a taxpayer must have a tax liability after other
nonrefundable tax credits that is equal to or greater than the maximum amount of qualified
expenses for the tax credit. For example, for a childless married couple adopting a child in tax
year 2008, the full tax credit and exclusion would be claimed in tax year 2008, only if the
taxpayer (the married couple) has an adjusted gross income (AGI) between approximately ⁴³
$90,000 and $174,730. If the taxpayer has an income outside this range, the taxpayer will have a
reduced credit or no credit in the tax year 2008, but in some cases may be able to claim the
balance of the credit in future tax years (in up to 5 future tax years).
The adoption tax credit is available to families at all incomes below the level at which the
adoption tax credit is completely phased out ($214,730 in tax year 2008). In practice, because the

³⁹^L^o^{s A}ⁿ^g^e^{les T}ⁱ^mes^{, B}^u^sⁱ^ne^s^s^:^“^P^e^r^s^ona^{l Fi}^na^nc^e^;^Aⁱ^{d is}^A^v^a^ila^ble^{to H}^e^lp^Ea^s^e^A^doptio^{n B}^u^r^d^eⁿ^,”^{p. C}²^{, J}^u^ly^31,
²⁰⁰^{5 (}^h^e^r^eⁱ^na^f^t^e^r^r^e^f^e^r^r^e^{d to a}^s^P^e^r^s^{onal F}ⁱⁿ^anc^e^;^Ai^{d is}^Av^a^ila^ble^).
⁴⁰^De^pa^rtm^e^{nt of}^He^a^{lth a}^{nd H}^u^m^a^{n Se}^rv^ic^e^s^{, A}^d^mⁱ^nistra^{tion f}^o^{r Ch}^ildre^{n a}^nd^Fa^m^ilie^{s, Childre}^{n’s B}^u^re^a^u^{, NA}^IC,
^Employ^e^r^-Provⁱ^de^d^Ad^op^tio^{n Be}ⁿ^e^fits⁽²⁰⁰⁴⁾^{, a}^v^a^ila^ble^a^t^htt^p^://w^w^w^.c^hildw^e^lfa^r^e^.^g^o^v^/^pubs^/^f^_be^ne^fⁱ^.cfm^.
⁴¹^Ibid^.
⁴²^Ibid^.
⁴³^Cal^c^u^l^atⁱ^oⁿ^s^b^y^t^h^{e Co}ⁿ^g^ressi^oⁿ^al^Research^S^e^rvi^{ce (CRS}^{) u}^sⁱⁿ^{g S}^y^s^T^T^I^M^(S^y^s^t^e^m^f^o^{r T}^a^x,^T^r^an^s^f^{er an}^d^In^co^m^e
^Mode^li^ng⁾^,^a^c^a^s^e^sⁱ^m^u^la^{tion m}^ode^l.

adoption tax credit only works to offset tax liability after other nonrefundable tax credits (in other
words, it is not refundable), taxpayers whose tax liability (after other nonrefundable tax credit) is
lower than their qualified adoption expenses will receive a reduced adoption tax credit or no
adoption tax credit. The interaction of the adoption tax credit with the other nonrefundable credits
is significant because when a taxpayer (with qualified adoption expenses) adopts a child, the
taxpayer becomes eligible for a $1,000 child tax credit (for the adopted child). The child tax
credit reduces tax liability before the adoption tax credit.
For example, in tax year 2008 a married couple adopts a child and has qualified adoption
expenses (in tax year 2008) of $15,000. If the couple’s income is $50,000, their income tax
liability before credits is $4,657. After the nonrefundable child credit of $1,000, their remaining
tax liability is $3,657. This is the maximum adoption tax credit the couple can claim, with the
remaining credit ($8,082) carried over to future tax years.
As shown in Table 3, taxpayers claiming the adoption tax credit accounted for only .07% of all
tax returns, reflecting a relatively small number of all taxpayers claiming the adoption tax credit.
Few taxpayers claiming the adoption tax credit had an AGI of less than $30,000 or more than
$200,000. As shown in Table 3, the average credit for every AGI class was below the maximum
adoption tax credit. However, the average credit increases with the AGI class, reflecting the
increase in tax liability to offset with the credit. The exception is the $200,000 or more AGI class
in which few taxpayers claim the adoption tax credit, reflecting the phaseout of the adoption tax
credit.
Table 3. Utilization of the Adoption Tax Credit, Tax Year 2004
^Adjusted^{Total Tax}^{Tax Returns}^{with the}^{Share of T}^otal^Amou^{nt of}^{Average Credit}
^{Gross In}^come^Returns^Adoption^{Tax Returns}^Adoption^Amou^{nt per}
^Class^{Tax Credit}^{Tax Credit}^Return
^{Under $}^30,0⁰⁰^67,4^07,1⁰⁷^3,77⁵^0.01%^$2,45^2,00⁰^$65⁰
^$30,0⁰⁰^to^24,8^39,0^{17 22,0}⁹⁸^0.09%^$30,8^89,0⁰⁰^$1,39⁸
^{under $5}^0,00⁰
^$50,0⁰⁰^to^18,8^54,9^{17 30,6}²⁵^0.16%^$98,1^93,0⁰⁰^$3,20⁶
^{under $7}^5,00⁰
^$75,0⁰⁰^to^11,1^40,4^{08 16,6}²³^0.15%^$64,1^95,0⁰⁰^$3,86²
^{under $1}^00,0⁰⁰
^$10^0,00^{0 to}^12,0^88,4^{23 19,4}³⁹^0.16%^$15^0,20^8,00⁰^$7,72⁷
^{under $2}^00,0⁰⁰
^$20^0,00^{0 a}^nd^4,06^4,88^{4 809}^0.02%^$5,24^8,00⁰^$6,48⁷
^over
^Total^138,³⁹^4,75^{4 93,3}⁶⁹^0.07%^$35^1,18^4,00⁰^$3,76¹
^Source:^{Table pr}^epared^{by t}^he^{Congressional Research Service (}^{CRS) from Internal Reven}^{ue Serv}^ice,^Individ^ual
^{Complete Re}^{port, Publication 1304}^{, Table 3.3.}

The percentage of total tax returns using the adoption tax credit has increased since tax year 1997,
the first year of the credit, when .03% of total tax returns claimed the adoption tax credit. The
change to the phase-out income level made by the Economic Growth and Tax Relief ⁴⁴
Reconciliation Act (EGTRRA, P.L. 107-16) significantly increased the percentage of tax returns
with an adjusted gross income between $100,000 and $200,000 claiming the adoption tax credit
(from .03% in tax year 2000 to .16% in tax year 2004).
Making the adoption tax credit refundable may allow more taxpayers at lower levels of AGI to
benefit from the adoption tax credit. However, doing so would increase the cost of the credit. The
current cost of the adoption tax credit is relatively small ($351.2 million in credit claimed in tax
year 2006); in contrast, in tax year 2006, $3.5 billion was claimed for the child and dependent
care credit and $31.7 billion for the child tax credit cost. One consideration in making the
adoption tax credit refundable is an issue that arises with all refundable tax credits—the
refundable tax credit may encounter overclaim problems similar to those experienced with the ⁴⁵
Earned Income Tax Credit (EITC).
The amount of the adoption tax credit is limited by tax liability (after other nonrefundable tax
credits), not by the cost of the adoption. As AGI increases, larger amounts of the adoption tax
credit can be used to offset tax liability (and reduce the final adoption cost). Therefore, assuming
a taxpayer adopting a child out of foster care has qualified adoption expenses, that taxpayer has a
greater chance of having those costs covered by the adoption tax credit. This is because foster
care adoptions are the least expensive, with costs ranging from $0 to $2,500. However, even to ⁴⁶
reach $2,500 of tax liability, a taxpayer must have an AGI of approximately $50,000. Because
of the carryover provision, any adoption tax credit not claimed in the current tax year may be
claimed in future tax years (up to five tax years).
Because costs tend to be much higher for domestic private adoptions and intercountry adoptions,
a taxpayer will have to have a higher AGI (and higher tax liability) to utilize the maximum value
of the adoption tax credit (and recover more of the adoption costs). Where the adoption costs are
greater than the maximum value of the credit (which may be the case for some domestic private
adoptions and intercountry adoptions), the taxpayer will not recover the full cost of the adoption
through the adoption tax credit, even if the taxpayer can claim the maximum adoption tax credit.
For example, if an adoption costs a taxpayer $30,000, the taxpayer will receive the maximum
adoption tax credit if his or her AGI is between approximately $102,000 and $174,730. However,
the final adoption costs will still be greater than the maximum adoption tax credit.
As a result of the phaseout (income limitation) and nonrefundability of the tax credit, many
taxpayers may not be able to take the full adoption tax credit for an adoption. This raises the
policy issue of whether, and how, to expand the tax provisions to increase the use of the tax
provisions, and whether federal and state subsidies may be more efficient than tax provisions in
helping offset the costs of adoption.

⁴⁴^EG^T^R^R^A⁽^P^.L^{. 1}^07-¹⁶⁾^r^a^is^e^d^th^e^inc^o^m^e^thr^e^s^hold^f^o^r^the^p^h^a^s^e^o^{ut of}^the^a^d^op^tio^{n ta}^x^c^r^e^d^{it f}^r^om^$75^,0⁰⁰^to
^$15^0,⁰⁰^0.
⁴⁵^Forⁱⁿ^f^o^r^m^a^{tion on}^the^pol^ic^y^is^sue^s^f^o^r^the^EI^T^C^{, s}^e^e^C^R^S^R^e^por^t^R^S²¹⁴⁷^7,^T^h^{e E}^a^rn^ed^Iⁿ^co^{me T}^a^{x Cred}ⁱ^t⁽^E^IT^C):
^L^e^gⁱ^sla^{tive Issu}^es^,^by^Christine^S^c^ott.
⁴⁶^Ibid^{. Ma}^ny^c^h^ildreⁿ^a^d^o^p^te^d^ou^t^of^the^f^o^ste^r^c^a^r^e^s^y^ste^m^m^e^e^t^the^de^fⁱ^nitio^{n of}^“^s^pe^cⁱ^a^l^ne^e^d^s”^inc^l^ude^dⁱⁿ^the^ta^x
^c^ode^{, a}ⁿ^{d a}^s^de^s^c^rⁱ^be^dⁱⁿ^the^te^x^t^a^bov^e^,^a^ta^x^p^ay^e^r^doe^s^not^ne^e^d^t^o^ha^v^e^aⁿ^y^qua^lif^yⁱ^ng^a^doptio^{n e}^x^pe^ns^e^s^{to c}^l^aⁱ^m
^the^f^u^{ll a}^m^{ount of}^the^a^d^o^p^tio^{n ta}^x^c^r^e^d^it.

Congress considered the efficiency of adoption tax provisions and adoption subsidy programs in
the 1980s. In 1980, the federal government began sharing (with the states) the cost of providing
monthly subsidies for parents who adopt children with special needs (Adoption Assistance and
Child Welfare Act of 1980, P.L. 96-272). This federal adoption assistance program, which helps
parents with the ongoing costs of raising an adoptive special needs child, is authorized under Title
IV-E of the Social Security Act. In 1981, the Economic Recovery Tax Act (P.L. 97-34) established
an itemized tax deduction for certain costs of adopting a child with special needs. The provision
was intended to encourage adoption of special needs children by relieving some of the financial ⁴⁷
burden for taxpayers.
In 1986, the Tax Reform Act (P.L. 99-514) repealed the itemized deduction and instead expanded
the Title IV-E program to require that states provide direct assistance to adoptive parents to help
with the initial and nonrecurring costs of adopting a special needs child. That legislation also
authorized federal matching grants to states for this purpose, which, as implemented, range up to
$2,000 for an adoptive family, with the federal government reimbursing 50% ($1,000) of the cost
to the state. In making this change, Congress believed that the itemized tax deduction provided ⁴⁸
the greatest benefit to high-income earners. Congress also believed that agencies with expertise
in placing children with special needs should have budgetary control over adoption assistance, ⁴⁹
and that grant programs would facilitate more appropriate federal spending than the tax system.
Since 1997, however, when P.L. 104-188 first provided for an adoption tax credit, federal
assistance for adoption has been provided through both grant programs and the tax code.
Although the maximum amount of qualified expenses is the same for all adoptions, a taxpayer
who adopts a special needs child is assumed to have incurred the maximum amount of qualified
expenses (regardless of actual expenses) and, therefore, has the maximum adoption tax credit.
Special needs children, by definition, are considered hard to place for adoption without assistance
to their adoptive parents. Providing a preference for one type of adoptive child over another in the
federal tax code may be viewed as unfair or inequitable—a taxpayer adopting a special needs
child receives a larger tax benefit than a taxpayer adopting a non-special needs child, even if both
taxpayers have the same total costs of adoption. However, the preference for special needs
children is a policy decision made by Congress to encourage adoption of children who might ⁵⁰
otherwise enter adulthood without a permanent family.

⁴⁷^Joint^Com^m^itte^e^{on T}^a^x^a^tion,^G^e^ne^r^a^{l Ex}^pl^an^ati^oⁿ^of^the^Ec^o^nomⁱ^c^Re^c^o^v^e^r^y^Tax^Ac^{t of}¹⁹⁸¹^,^J^C^S-^10-^87,
^D^e^c^e^m^b^e^r^{29, 1}⁹⁸¹^,^pp.⁵⁷^-⁵^8.
⁴⁸^T^h^e^use^of^f^e^de^ra^l^m^a^tc^hing^g^r^aⁿ^{ts prov}^ide^d^a^ssistaⁿ^c^e^{to a}^g^r^e^a^t^e^r^ra^ng^e^of^fa^m^ilie^s.
⁴⁹^Joint^Com^m^itte^e^{on T}^a^x^a^tion,^G^e^ne^r^a^{l Ex}^pl^an^ati^oⁿ^of^the^T^a^x^Re^fo^r^m^Ac^{t of}¹⁹⁸⁶^,^Ma^y^{4, 19}⁸⁷^{, p}^p^.^52-^53.
⁵⁰^T^h^{e p}^r^ef^eren^c^e^f^o^{r sp}^eci^alⁿ^eed^{s ch}ⁱ^l^d^{ren h}^a^{s exi}^s^t^e^d^siⁿ^{ce t}^h^{e i}^t^emⁱ^z^ed^d^e^d^u^c^tⁱ^oⁿ^f^o^{r ado}^p^tⁱ^oⁿ^expen^s^es,^w^hⁱ^c^h^w^a^s
^only^f^o^r^t^h^e^a^d^o^p^ti^on^of^a^s^p^e^cⁱ^a^l^ne^e^d^s^c^h^ild^{, w}^a^s^e^s^ta^blis^he^{d by}^the^Ec^onom^ic^R^e^c^o^v^e^r^y^T^a^x^A^c^{t of}¹⁹⁸¹⁽^P^.L^{. 9}⁷^-
³⁴⁾^.^T^h^{e ad}^o^p^tⁱ^oⁿ^t^a^{x cred}ⁱ^t^est^a^blⁱ^s^h^e^d^b^y^P^.^L^.¹⁰⁴^-¹⁸⁸^al^so^con^t^aⁱⁿ^e^d^a^p^r^ef^eren^ce^f^o^{r sp}^eci^alⁿ^eed^{s ch}ⁱ^l^d^{ren i}ⁿ^t^h^e
^f^o^r^m^of^a^hig^h^e^r^lim^{it on q}^u^a^lif^ie^{d e}^x^pe^ns^e^s^f^o^r^the^a^d^o^p^ti^on^of^a^s^p^e^cⁱ^a^l^ne^e^d^s^c^h^il^{d. EG}^T^R^R^A⁽^P^.^L^{. 107-}¹⁶⁾
^e^s^ta^blis^he^{d t}^h^a^t^be^gⁱⁿⁿ^ingⁱⁿ^ta^x^y^e^a^r^2003,^a^ta^x^p^a^y^e^r^a^doptiⁿ^g^a^s^p^e^cⁱ^a^l^ne^e^d^s^c^h^il^{d w}^a^s^a^s^s^u^m^e^{d t}^o^ha^v^e^the
^m^a^xⁱ^m^u^m^am^{ount of}^qua^lif^ie^{d a}^d^opti^oⁿ^e^x^pe^ns^e^s^f^o^r^the^a^d^o^p^tio^{n t}^a^x^pr^ov^is^ions^.

Federal tax assistance for adoption provides incentives for both domestic (public and private) and
intercountry adoptions. However, domestic adoptions are favored under the tax provisions for
adoption because for a domestic adoption, qualifying expenses may be claimed even if a domestic ⁵¹
adoption does not finalize. Intercountry adoptions must become finalized before a taxpayer can ⁵²
claim any qualifying expenses for the tax credit or income tax exclusion. Intercountry adoptions
are typically considered more expensive and less predictable for finalization than domestic ⁵³
adoptions. A family may spend a great deal of money for an intercountry adoption, but will not
receive a tax benefit if something prevents the adoption from becoming final. The preference in
the federal tax provisions for domestic adoption may be considered inequitable or unfair by some
families that do not receive a tax benefit because their intercountry adoption was not finalized.
A current policy issue surrounding the tax credit and income tax exclusion is the sunset of certain
provisions established in the Economic Growth and Tax Relief Reconciliation Act of 2001
(EGTRRA, P.L. 107-16). EGTRRA provided for an increase in the maximum qualified expenses
and increased the amount of income where the credit phaseout begins (the income limitation).
However, to remain in compliance with the Congressional Budget Act, EGTRRA included a
sunset provision—the changes will expire and, in 2011, prior law will take effect. Taxpayers,
beginning in tax year 2011, will be allowed to claim up to $5,000 in qualified expenses for non-
special needs children and up to $6,000 for special needs children (all expenses must be
documented, regardless of special needs status). Taxpayers with incomes greater than $75,000
will receive a reduced adoption tax credit (because of the phaseout), and taxpayers with incomes
greater than $115,000 ($40,000 above the threshold) will not be eligible for the adoption tax
credit.

As noted earlier, federal tax assistance for adoption began with the Economic Recovery Tax Act
of 1981 (P.L. 97-34), which provided an itemized deduction for adoption expenses, which was
repealed by the Tax Reform Act of 1986 (P.L. 99-514). However, the 1986 law also amended Title
IV-E of the Social Security Act to require states to make direct payments to parents adopting
children with special needs to help offset the nonrecurring costs of adoption (attorney fees, court ⁵⁴
costs, etc.) and authorized 50% federal matching funds to states for these purposes.
Several bills subsequently introduced proposed tax incentives for adoption. Tax provisions for
adoption (a tax credit and income tax exclusion for employer provided adoption programs) were ^th⁵⁵
included in the Balanced Budget Act of 1995 (H.R. 2491, 104 Congress), which was vetoed by

⁵¹^I^R^C^§^23.
⁵²^Ibid^.
⁵³^D^H^S^{, A}^C^{F; Child}^re^n’s^Bure^a^u^,^N^A^IC.
⁵⁴^Joint^Com^m^itte^e^{on T}^a^x^a^tion,^G^e^ne^r^a^{l Ex}^pl^an^ati^oⁿ^of^the^T^a^x^Re^fo^r^m^Ac^{t of}¹⁹⁸^6,^J^C^S-¹⁰^-⁸^{7, Ma}^y^{4, 1}⁹⁸⁷^,^pp^{. 5}²^-
^53.
⁵⁵^T^h^{is le}^gⁱ^sla^{tion is a}^l^so^re^f^e^rre^{d to a}^s^the^Se^v^e^n-Ye^a^r^Ba^la^nc^e^d^Bu^dg^e^t^Re^c^onc^ilia^tio^{n A}^c^{t of}¹⁹⁹^{5, t}^h^e^orig^ina^l^title
⁽^c^onti^nue^d.^..)

President Clinton (for reasons unrelated to the adoption tax provisions). The Adoption Promotion ^th
and Stability Act of 1996 (H.R. 3286, 104 Congress) also proposed an adoption tax credit and
income tax exclusion. The Finance Committee report on the bill noted that one justification for
the adoption tax provisions was that the financial costs of adoption should not be a barrier to ⁵⁶
adoption.
P.L. 104-188 provided a federal tax credit and income tax exclusion to taxpayers for qualified
adoption expenses. Qualifying expenses were limited to $5,000 for an adoption and to $6,000 for
the adoption of a special needs child. P.L. 104-188 provided a phase-out provision that reduced
the tax benefits for taxpayers with incomes of more than $75,000 and less than $115,000. P.L.
104-188 also included a carryover provision so that a taxpayer with more adoption tax credit than
tax liability could carryover the excess tax credit for up to five years. Finally, the act provided
several definitions and special rules (that remain in current law), including qualifying expenses,
eligible child, child with special needs, and special rules for intercountry adoptions.
P.L. 105-34 clarified that the adoption tax credit is claimed the tax year after qualified expenses
are incurred only when the adoption has not been finalized. Previously, the provision simply
stated that the adoption tax credit was claimed the tax year after expenses were incurred, except
for expenses incurred the tax year the adoption was finalized (which could be claimed the tax
year incurred). P.L. 105-34 also conformed the definition of adjusted gross income for the
phaseout of the income tax exclusion to be the same definition of adjusted gross income used for
the phaseout the adoption tax credit.
P.L. 105-206 changed the carryover provision of the credit so that the phaseout of the credit
applies only in the year in which the credit is generated and does not reduce carryover credit
amounts.
EGGTRA (P.L. 107-16) increased the limit on qualified adoption expenses to $10,000 for all
children (from $5,000 for non-special needs children and $6,000 for special needs children). In
addition, EGTRRA increased the income level for the beginning of the credit phaseout to
$150,000 (from the previous level of $75,000) and provided an inflation adjustment for the limit
on qualified adoption expenses and the phaseout income level based on the consumer price index

^(...c^on^tin^ue^d)
^o^f^t^h^{e l}^e^gi^sl^atⁱ^oⁿ^{as p}^a^ssed^b^y^t^h^{e Ho}^u^s^{e o}^f^Rep^r^esen^t^a^tⁱ^v^{es an}^d^b^e^f^o^{re t}^h^{e S}^eⁿ^a^t^e^am^en^d^m^en^t^.^T^h^{e t}^e^xt^ab^o^v^{e u}^s^{es t}^h^e
^title^f^r^om^the^c^onf^e^r^eⁿ^c^e^re^{port (H.Re}^p^{t. 1}^04-³⁵⁰⁾^a^g^re^e^d^to^by^the^House^oⁿ^Nov^e^m^b^e^r^{17, 1}⁹⁹⁵^.
⁵⁶^U^.^{S. C}^ong^re^s^s^,^Com^m^itte^e^{on Fi}^na^nc^e^,^S.Re^pt^{. 1}⁰⁴^-²⁷^{9, A}^d^o^p^ti^on^P^r^om^otio^{n a}ⁿ^d^Sta^b^ility^A^c^{t of}¹⁹⁹⁵^{, p}^p^.^2-5^.

(CPI). EGTRRA also included a sunset provision for the legislation. The changes to the adoption
tax provisions are scheduled to expire in 2011.
Congress believed that the EGTRRA provisions were necessary to continue to encourage
adoptions. This belief was based on reported increases in adoption expenses and the success of ⁵⁷
the tax credit and income tax exclusion in reducing the final costs of adoption for taxpayers.
The Job Creation and Workers Assistance Act (P.L. 107-147) clarified that qualifying expenses
for the adoption of children with special needs do not need to be documented. Therefore, a family
seeking to adopt a child with special needs could claim the maximum credit without having to
document expenses (P.L. 107-147). The conference report accompanying H.R. 1836 (EGTRRA,
P.L. 107-16) provided that the maximum amount of qualifying expenses was assumed to have
been claimed (without the documentation requirement) in the case of a special needs adoption for
tax years beginning after 2002. However, the legislative language of EGTRRA did not make this ⁵⁸
provision clear. Therefore, a technical correction was made in P.L. 107-147. P.L. 107-147 also
provides that any qualifying expenses incurred prior to tax year 2002 are subject to the pre-
EGTRRA provisions. In other words, expenses incurred prior to 2002 were limited to qualifying
expenses of $5,000 for non-special needs children and $6,000 for special needs children.
Taxpayers claiming expenses prior to 2002 were also subject to the phaseout income level that
existed prior to EGTRRA.

In the 110^th Congress, legislation was introduced (H.R. 273, H.R. 471, H.R. 3758,S. 561, and S.
3079) that would have repealed the EGTRRA sunset provision as it relates to the adoption tax
provisions. H.R. 1074, H.R. 3192, H.R. 7091, and S. 2407, would have increased the maximum
qualified expenses from $10,000 to $15,000 (with an inflation adjustment) and made the adoption
tax credit refundable. H.R. 4313 would have provided an additional $2,000 of tax credit for
adopting an older child.
^Ch^rⁱ^stiⁿ^{e Sco}^tt
^Specialis^{t i}ⁿ^{Social P}^o^lic^y
^cs^cot^t^@^crs^.^l^o^c.g^o^v^,^7-⁷³⁶⁶

⁵⁷^Joint^Com^m^itte^e^{on T}^a^x^a^tion,^G^e^ne^r^a^{l Ex}^pl^an^ati^oⁿ^of^Tax^Le^gis^l^at^ion^{in t}^h^e¹⁰⁷^th^C^o^ngr^e^s^s^,^J^C^S-^1-^{03, J}^a^nua^r^y^24,
²⁰⁰^3.
⁵⁸^U^.^{S. C}^ong^r^e^s^s^,^C^o^m^m^itte^e^{on W}^a^y^s^a^{nd Me}^aⁿ^s^,^Ec^o^nom^ic^G^r^ow^t^h^a^nd^Tax^Re^lie^f^Re^c^onc^ili^ati^on^A^c^{t of}²⁰^01,
^Coⁿ^f^eren^{ce R}^e^p^o^r^t^t^o^A^cco^mp^an^y^H.^R^.¹⁸³⁶^{, H}^.^R^e^pt.¹⁰^7-⁰⁸⁴^,^Ma^y^{26, 20}^01,^p^p^.¹⁴^0-¹^41.