Tuesday, February 12, 2013
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.
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. The American Taxpayer Relief Act of 2012 (ATRA; P.L. 112-240) made the EGTRRA provisions permanent. In tax year 2013, the maximum adoption tax credit will be $12,970 and the tax credit is not refundable.
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). Preliminary data from the Internal Revenue Service (IRS) for tax year 2010 show that $1.2 billion in adoption tax credits was claimed on tax year 2010 returns, with $1 billion of the credit received as a refund (in excess of tax liability). In tax year 2009, when the adoption tax credit was not refundable, a total of $280 million was claimed on tax year 2009 tax returns.
Policy issues associated with the tax provisions include 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.
Date of Report: February 1, 2013
Number of Pages: 15
Order Number: RL33633
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