Tax Benefits for Families: Adoption

Christine Scott
Specialist in Social Policy

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.

The Patient Protection and Affordable Care Act (P.L. 111-148) provided, for tax years 2010 and 2011 only, that the adoption tax credit be refundable. P.L. 111-148 also increased the qualified expenses for the adoption tax credit and the income tax exclusion for employer provided adoption assistance to $13,170 for tax year 2010, with this amount indexed for inflation in 2011.

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312) extended the EGTRRA provisions for adoption to tax year 2012. Beginning in tax year 2013, pre-EGTRRA law will be effective—a $6,000 limitation and applicable for special needs adoptions only, no income exclusion for employer provided adoption assistance, and the adoption tax credit will be nonrefundable.

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). These provisions, combined with the nonrefundability of the credit in prior years, limited the number of taxpayers who benefited from the credit. As a result, in tax year 2008, 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 2008, approximately 86,600 tax returns, or .06% of all tax returns, included a claim for the adoption tax credit, with a total credit value claimed of $353.5 million.

Policy issues associated with the tax provisions are the limited availability of the credit resulting from the phase-out rule, 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.

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.


Date of Report: July 22, 2011
Number of Pages: 16
Order Number: RL33633
Price: $29.95

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