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
Date of Report: February 1, 2013
Number of Pages: 15 Order Number: RL33633 Price: $29.95
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