Adoption Tax Benefits: An Overview
Changes from October 19, 2020 to May 30, 2025
This page shows textual changes in the document between the two versions indicated in the dates above. Textual matter removed in the later version is indicated with red strikethrough and textual matter added in the later version is indicated with blue.
Adoption Tax Benefits: An Overview
Updated May 30, 2025 (R44745) Jump to Main Text of ReportContents
- Introduction
- Brief Overview of Adoption in the United States
- Number of Adoptions
- Trends in Number of Adoptions Overall and by Adoption Type
- Costs of Adoption
- The Adoption Tax Credit
- Eligibility Requirements
- Eligible Child
- Qualifying Expenses
- Filing Requirements to Claim the Credit
- Timing of When Qualifying Expenses Can Be Claimed for Domestic vs. International Adoptions
- Calculating the Credit
- Income Limitation
- Nonrefundability and Carryforward
- Rules for Special Needs Children
- Data on the Adoption Tax Credit
- The Exclusion for Employer-Provided Adoption Assistance
- Legislative History of the Credit and Exclusion
- The Small Business and Job Protection Act of 1996 (P.L. 104-188)
- The Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16)
- The Patient Protection and Affordable Care Act (P.L. 111-148)
- The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312)
- The American Taxpayer Relief Act of 2012 (P.L. 112-240)
- Policy Considerations
- Who Benefits from Adoption Tax Incentives?
- Enforcement of the Temporary Refundable Adoption Tax Credit (2010-2011)
- Policy Options
- Replace the Current Tax Benefits with a Direct Spending Program
- Make the Credit and Exclusion Larger
- Make the Credit Refundable
- Provide Parity Between Different Types of Adoptions for the Credit and Exclusion
- Allow Adoptive Parents to Submit a Third-Party Affidavit to Verify an Adoption
- Convert the Exclusion for Employer-Provided Adoption Assistance into a Deduction
Figures
Tables
- Table 1. When Expenses Can Be Used to Claim the Adoption Tax Credit for Domestic and International Adoptions
- Table 2. Number of Taxpayers Claiming the Adoption Tax Credit and Total and Average Credit Amount, by AGI, 2022
- Table 3. Distribution of Adoption Tax Credit Dollars by Adjusted Gross Income (AGI) 2011 and 2022
- Table A-1. Calculating the Adoption Tax Credit for $20,000 of Adoption Expenses
Summary
The federal government supports adoption in two primary ways: federal grants to state The federal government supports adoption in two primary ways: federal grants to stategovernments and tax benefits for individual taxpayers that help offset the costs of adopting a governments and tax benefits for individual taxpayers that help offset the costs of adopting a
Although the credit may be claimed for nearly all types of adoptions (excluding the adoption of a Although the credit may be claimed for nearly all types of adoptions (excluding the adoption of a
adoptions and for adoptions of children with special needs (generally children whom the state child welfare agency considers adoptions and for adoptions of children with special needs (generally children whom the state child welfare agency considers
difficult to place for adoption).difficult to place for adoption).
The credit is reduced for taxpayers with income over $The credit is reduced for taxpayers with income over $
However, However, any unused part of the credit may be carried forward and claimed on future tax returns for up to five years after initially claimed.the credit may be carried forward and claimed on future tax returns for up to five years after initially claimed.
income taxes on some or all of the value of this benefit. The amount that can be excluded from a taxpayerincome taxes on some or all of the value of this benefit. The amount that can be excluded from a taxpayer
at a maximum amount per adoption, which is the same as the maximum amount of the credit: $at a maximum amount per adoption, which is the same as the maximum amount of the credit: $
can claim the exclusion and the credit concurrently for the same adoption, but cannot claim both tax benefits for the same can claim the exclusion and the credit concurrently for the same adoption, but cannot claim both tax benefits for the same
expenses. Many of the eligibility rules for the adoption tax credit apply to the exclusion for employer-provided adoption expenses. Many of the eligibility rules for the adoption tax credit apply to the exclusion for employer-provided adoption
assistance.assistance.
adoptions. However, there is currently little evidence adoptions. However, there is currently little evidence
a significant number of lower- and middle-income Americans adopt. a significant number of lower- and middle-income Americans adopt.
employer-provided adoption assistance to achieve certain policy goals. For example, Congress may move to replace these employer-provided adoption assistance to achieve certain policy goals. For example, Congress may move to replace these
benefits with a direct spending program, especially if Congress views direct spending as more effective at encouraging benefits with a direct spending program, especially if Congress views direct spending as more effective at encouraging
adoptions. Alternatively, Congress could eliminate adoption tax benefits and direct any additional revenue to deficit adoptions. Alternatively, Congress could eliminate adoption tax benefits and direct any additional revenue to deficit
reduction. Congress could also choose to make the adoption tax credit refundable, so that taxpayers with little or no tax reduction. Congress could also choose to make the adoption tax credit refundable, so that taxpayers with little or no tax
liability could claim the entire value of the credit in a given year. Or Congress could modify adoption tax benefits in other liability could claim the entire value of the credit in a given year. Or Congress could modify adoption tax benefits in other
ways, such as changing the maximum amount of the credit or the income level at which the credit phases out. ways, such as changing the maximum amount of the credit or the income level at which the credit phases out.
Additionally, policymakers could modify some of the eligibility rules or methods to make the credit easier to administer.
Introduction
Did P.L. 115-97 ModifyAdoption Tax Benefits?At the end of 2017, President Trump signed P.L. 115-97 (popularly known as the Tax Cuts and Jobs Act) into law. P.L. 115-97 made numerous changes to the federal income tax for individuals and businesses.1 The final law did not make any changes to either the adoption tax credit or the exclusion for employer-sponsored adoption assistance.
Nonetheless, the changes in the law could indirectly impact the value of these benefits for certain taxpayers. For example, insofar as the law lowers a taxpayer's income tax liability, the taxpayer may also receive a smaller adoption tax credit in a given year since as a nonrefundable credit the final value cannot exceed income tax liability.
governments and tax benefits for individual governments and tax benefits for individual
taxpayers that help offset the costs of adopting taxpayers that help offset the costs of adopting
including a summary of administrative data on the adoption credit (similar data on the exclusion including a summary of administrative data on the adoption credit (similar data on the exclusion
are unavailable). Next, the report summarizes the legislative history of these tax benefits. Finally, are unavailable). Next, the report summarizes the legislative history of these tax benefits. Finally,
the report concludes with a discussion and analysis of potential policy options related to these the report concludes with a discussion and analysis of potential policy options related to these
benefits.benefits.
Brief Overview of Adoption in the United States
Adoption is a social and legal process in which an adult is formally made the parent of another Adoption is a social and legal process in which an adult is formally made the parent of another
individual (usually a child). The legal process in adoption generally requires that a court individual (usually a child). The legal process in adoption generally requires that a court
terminate the parental rights and responsibilities of birth parents (or earlier adoptive parents) and terminate the parental rights and responsibilities of birth parents (or earlier adoptive parents) and
subsequently grant those rights and responsibilitiessubsequently grant those rights and responsibilities
three ways:three ways:
Across the decade from 2010 through 2019, total adoptions in the United States declined from 116,000 in 2010 to 108,000 in 2014 before climbing to roughly 121,000 in 2019 (the most recent year for which data on all types of adoptions are available from the Department of Health and Human Services). Of those 2019 adoptions, 53% were domestic public agency adoptions, 44% were principally domestic private (including adoptions of a spouse's child), and 2% were international adoptions.
During 2019, 47 per 100,000 adults became adoptive parents. The comparable rate was 44 per 100,000 adults in 2015 and 48 per 100,000 adults in 2010.7 Trends in Number of Adoptions Overall and by Adoption Type Earlier data collection efforts suggest a peak of roughly 175,000 adoptions in the United States in 1970.8 As recently as 2005, there were an estimated 146,000 adoptions in the United States.9 However, methodology for counting those adoptions varied considerably and those numbers of total adoptions are not necessarily comparable to the total estimates shown in Figure 1 for 2010 through 2019.10 Comparable data on the number ofThe number of international adoptions completed by U.S. citizens peaked at nearly 23,000 in 2004. Since then, the number has steadily declined and was at roughly 1,500 in 2022.12
Primarily, the number the number
Although Department of Health and Human Services (HHS) data on the number or share of stepchild adoptions that are counted as domestic private adoptions are unavailable, recent survey information from the National Council For Adoption (NCFA), an adoption advocacy organization, suggests they comprise a roughly half of all private domestic adoptions.15
Figure 1. Trends in the Number of Adoptions, by Type, 1997-2022
Comparable data are not available for total adoptions, or for all types of adoptions for all years
Source: Data for 2010-2019 are from the Department of Health and Human Services (HHS), Trends in U.S. Adoptions, 2010-2019, Child Welfare Information Gateway, April 2022. Data for all other years shown for domestic public agency adoptions are based on state-data reported via the Adoption and Foster Care Analysis and Reporting System Reporting Systemadopt_ref/adoption-adopt_ref/adoption-
agencies, individuals, agencies, individuals,
qualify for adoption tax benefits.qualify for adoption tax benefits.
of each adoption. However, of each adoption. However,
HHS has estimated16 cost ranges for different types of adoption as follows:cost ranges for different types of adoption as follows:
Actual costs may be higher depending on the particular circumstances of the adoption.
The Adoption Tax CreditThe adoption tax credit helps qualifying taxpayers offset some of the costs of adopting a child. The adoption tax credit helps qualifying taxpayers offset some of the costs of adopting a child.
Although the credit may be claimed for nearly all types of adoptions (excluding the adoption of a Although the credit may be claimed for nearly all types of adoptions (excluding the adoption of a
adoptions and for adoptions and for
What Is the Difference Between a Credit and an Exclusion?
A credit—like the adoption tax credit—reduces tax liability dollar for dollar of the value of the credit. For example,credit would have a net tax liability of $4,000.credit would have a net tax liability of $4,000.
provided adoption assistance—reduces the amount provided adoption assistance—reduces the amount
$100,000, but $10,000 of it is excluded from income, $100,000, but $10,000 of it is excluded from income,
In 2025, taxpayers may be able to receive an adoption credit of up to $17,280 per adoption (this amount is annually adjusted for inflation). The credit is reduced for taxpayers with income17 over $259,190 and is phased out completely for taxpayers with more than $299,190 in income (these amounts are subject to annual inflation adjustment). The maximum credit applies per adoption. This means that taxpayers who adopt more than one child in a year (e.g., as part of a sibling group) can receive up to the maximum credit for each child adopted.
The adoption credit is not refundable.18 However, the credit may be carried forward and claimed on future tax returns for up to five years after initially claimed. The eligibility rules and calculation of the credit are described in detail below.
Eligibility RequirementsBefore calculating the credit that a taxpayer can claim for a given year, the taxpayer must determine whether the child being adopted (or in the process of being adopted) is eligible, and the amount of qualifying expenses to which the credit can be applied.
Eligible ChildA taxpayer can only claim expenses related to the adoption of an eligible child.19 The term eligible child refers to children under age 18 and to older individuals who are physically or mentally incapable of taking care of themselves.20
Qualifying ExpensesQualifying expenses must be directly related to the adoption of an eligible child. They include21
22 Adoption of a Spouse
's spouse.
expenses of adopting their partnerexpenses of adopting their partner
Qualified adoption expenses do not include
a domestic partner (see shaded textbox)a domestic partner (see shaded textbox)
; or
Taxpayers cannot claim a credit for expenses that violate federal or state law.23
Filing Requirements to Claim the Creditadopted child (if known), their age, and the childadopted child (if known), their age, and the child
cases, the childcases, the child
adopting parents do not have or cannot obtain the childadopting parents do not have or cannot obtain the child
able to use an adoption taxpayer identification number or ATIN.able to use an adoption taxpayer identification number or ATIN.
TIN are not provided, the IRS may disallow the credit until additional information about the TIN are not provided, the IRS may disallow the credit until additional information about the
adopted child is provided by the taxpayer.adopted child is provided by the taxpayer.
credit.credit.
the credit that can be claimed for a given adopted child is still subject to the same limit ($the credit that can be claimed for a given adopted child is still subject to the same limit ($
17,280 in 2025).26 Timing of When Qualifying Expenses Can Be Claimed for Domestic vs.
International Adoptions
credit in the year credit in the year following the year the expense is paid. This means that the taxpayer may claim the year the expense is paid. This means that the taxpayer may claim
the adoption tax credit for expenses paid even if a domestic adoption is never finalized.the adoption tax credit for expenses paid even if a domestic adoption is never finalized.
27 Expenses paid in the year an adoption is finalized can be claimed on that yearExpenses paid in the year an adoption is finalized can be claimed on that year
Expenses paid Expenses paid after an adoption is finalized can be claimed the year the payment is made. an adoption is finalized can be claimed the year the payment is made.
children.children.
is finalized can only be claimed in the year the adoption is finalized. If an international adoption is finalized can only be claimed in the year the adoption is finalized. If an international adoption
is never finalized, the taxpayer cannot apply any expenses connected to that adoption attempt is never finalized, the taxpayer cannot apply any expenses connected to that adoption attempt
toward the credit. As with domestic adoptions, expenses incurred toward the credit. As with domestic adoptions, expenses incurred after an international adoption an international adoption
is finalized can be claimed the year they are paid.is finalized can be claimed the year they are paid.
Table 1. When Expenses Can Be Used to Claim the Adoption Tax Credit for
When Qualified Expenses
Year adoption is finalized
Year adoption is finalized
Years after the year the adoption is finalized
Year expenses are paid
Year expenses are paid
Any year before the adoption is finalized
The year after the year of payment
(So expenses incurred in 2025 would be used to claim the credit on a 2026 tax year return.)
Year adoption is finalized
(So if the adoption was finalized in 2025, expenses incurred before 2025 could be used to claim the credit on a 2025 tax return.) If an international adoption is never finalized, the taxpayer cannot apply any expenses connected to that adoption attempt toward the credit.
Source: IRC §23(a)(2) and IRC §23(e).
credit that can be claimed in a given year, per eligible child, is equal to the lesser of (1) qualifying credit that can be claimed in a given year, per eligible child, is equal to the lesser of (1) qualifying
adoption expenses that can be claimed in that year (see the discussion of timing in the preceding adoption expenses that can be claimed in that year (see the discussion of timing in the preceding
section) or (2) the maximum statutory amount of the credit per child. The maximum statutory section) or (2) the maximum statutory amount of the credit per child. The maximum statutory
amount is annually adjusted for inflation. If the child is a special needs child, the credit amount is amount is annually adjusted for inflation. If the child is a special needs child, the credit amount is
always the maximum statutory amount per child, irrespective of the actual expenses incurred. , irrespective of the actual expenses incurred.
(The definition of a (The definition of a
aggregate amount of the adoption tax credit that the taxpayer can claim on their tax return equals amount of the adoption tax credit that the taxpayer can claim on their tax return equals
the sum of the credit amounts for each eligible child.the sum of the credit amounts for each eligible child.
actual
income limitation (i.e., the maximum credit amount is phased down).income limitation (i.e., the maximum credit amount is phased down).
nonrefundable, the amount of the credit actually claimed in a given year by nonrefundable, the amount of the credit actually claimed in a given year by
definition cannot be greater than taxes owed. Hence, in cases where the definition cannot be greater than taxes owed. Hence, in cases where the
calculated credit is greater than the taxpayercalculated credit is greater than the taxpayer
she will be able to claim will be equal to their tax liability. For the purposes of she will be able to claim will be equal to their tax liability. For the purposes of
the adoption tax credit, the value of the credit in excess of tax liability can be the adoption tax credit, the value of the credit in excess of tax liability can be
income taxpayers will more likely be subject to the first limitationincome taxpayers will more likely be subject to the first limitation (income limit), while lower- and middle-, while lower- and middle-
income taxpayers are more likely to be subject to the second limitationincome taxpayers are more likely to be subject to the second limitation (nonrefundability). Notably, while . Notably, while
nonrefundability of the credit limits the amount that can be claimed in a given year, a taxpayer nonrefundability of the credit limits the amount that can be claimed in a given year, a taxpayer
may be able to recover the value of the credit on subsequent tax returns as a result of a five-year may be able to recover the value of the credit on subsequent tax returns as a result of a five-year
carryforward provision. Each of these limitations carryforward provision. Each of these limitations
Income Limitation
's modified adjusted gross income (MAGI) is above a phaseout threshold.modified adjusted gross income (MAGI) is above a phaseout threshold.
threshold equals $threshold equals $
amount phases down ratably (i.e., proportionally) if a taxpayeramount phases down ratably (i.e., proportionally) if a taxpayer
range—the amount of the tax credit is reduced by 50%. Similarly, if the taxpayerrange—the amount of the tax credit is reduced by 50%. Similarly, if the taxpayer
Taxpayers with income $40,000 or more Taxpayers with income $40,000 or more above the threshold—$—$
phaseout range of $40,000 is fixed and does not increase over time.phaseout range of $40,000 is fixed and does not increase over time.
Nonrefundability
excess of the credit above tax liability can be excess of the credit above tax liability can be
to five years. In other words, to five years. In other words,
benefit from being able to carry forward the unused credit, there are practical complexities to benefit from being able to carry forward the unused credit, there are practical complexities to
carrying a credit over several years. For example, taxpayers must keep track of when expenses carrying a credit over several years. For example, taxpayers must keep track of when expenses
are incurred and, if they carry forward a credit, how much they have claimed in previous years for are incurred and, if they carry forward a credit, how much they have claimed in previous years for
a given adoption. The stylized example ina given adoption. The stylized example in Table A-1 in the in the
complexity of claiming the adoption tax credit using the carryforward provision.complexity of claiming the adoption tax credit using the carryforward provision.
Rules for Special Needs Children
A taxpayer claiming the credit for the adoption of a special needs child is assumed to have A taxpayer claiming the credit for the adoption of a special needs child is assumed to have
incurred the maximum amount of qualifying expenses, regardless of the actual expenses incurred.incurred the maximum amount of qualifying expenses, regardless of the actual expenses incurred.
necessarily mean the child has a medical condition or a disability. Instead, for the purposes of necessarily mean the child has a medical condition or a disability. Instead, for the purposes of
these tax benefits, special needs adoptions are the adoptions of children whom the state these tax benefits, special needs adoptions are the adoptions of children whom the state (typically through its child child
welfare agencywelfare agency) considers considers more difficult to place for adoption without any assistance. This might be due to a disability or medical condition, but might also have to do with the child's age or membership in a sibling group seeking adoption together
purposes of adoption tax benefits is largely the same as purposes of adoption tax benefits is largely the same as
federal adoption assistance program that is included in Title IV-E of the Social Security Act.)federal adoption assistance program that is included in Title IV-E of the Social Security Act.)
Tribal governments do not have the authority under the law to make special needs determinations for purposes of the adoption tax credit. Since tribal governments have exclusive authority over custody proceedings within their jurisdictions (at the exclusion of state governments), parents adopting through a tribal court system cannot claim the adoption tax credit using a special needs determination.32
About 90% of domestic public agency adoptions, which are mostly adoptions from foster care, are special needs adoptions. 33 However, few other adoptions are determined to be special needs adoptions.special needs adoptions.considered to have special needs if the childconsidered to have special needs if the child
emotional disability; or child is member of a minority race/ethnicity)emotional disability; or child is member of a minority race/ethnicity)
to the reasonable conclusion that the child will not be adopted without assistance to the reasonable conclusion that the child will not be adopted without assistance
needs adoptions.)needs adoptions.)
As shown As shown
credit in credit in
maximum credit amount of $maximum credit amount of $
few taxpayers with AGIs of more than $200,000 received the credit as a result of the credit few taxpayers with AGIs of more than $200,000 received the credit as a result of the credit
Table 2. Number of Taxpayers Claiming the Adoption Tax Credit and Total and
2022 Tax Returns with the Adoption Credit
Adjusted Gross Income
Share of All Tax Returns
Number of Returns with Credit
Share of Returns with Credit
Total Credit Dollars (millions $)
Share of Credit Dollars
Average Credit Amount per Return
Under $25k
29%
2,019
3%
$1
0.4%
$504
$25k to under $50k
23%
7,040
12%
$12
5%
$1,674
$50k to under $75k
15%
18,209
32%
$43
17%
$2,386
$75k to under $100k
9%
10,028
17%
$41
16%
$4,126
$100k to under $200k
16%
16,677
29%
$137
53%
$8,236
$200k and over
8%
3,722
6%
$23
9%
$6,110
Total
100%
57,700
100%
$258
100%
$4,466
Source: Internal Revenue Service, Statistics of Income, Table 3.3.
Note: Items may not sum due to rounding.
generally increased between 1997 (when the credit was first in effect) and 2010, generally increased between 1997 (when the credit was first in effect) and 2010,
rising from about 30,000 to almost 100,000 during that period. After large decreases in 2011 and 2012, the number rebounded partially and has moved inconsistently between about 58,000 and 80,000 since.
Figure 2. Average Adoption Credit Amount and Number of Taxpayers Receiving the
and Table 3.3, and IRS Form 8839.and Table 3.3, and IRS Form 8839.
Note: Dollars
Figure 2 may have occurred for a variety of reasonsmay have occurred for a variety of reasons
recipients (and the average amount of the credit) between 2002 and 2009recipients (and the average amount of the credit) between 2002 and 2009, in comparison to the in comparison to the
period between 1997 and 2001period between 1997 and 2001, may be the result of may be the result of
Economic Growth and Tax Relief Reconciliation Act (EGTRRA; P.L. 107-16Economic Growth and Tax Relief Reconciliation Act (EGTRRA; P.L. 107-16), which effectively doubled
amount of the credit amount of the credit
well as more upper-income taxpayers being eligible to receive the credit.well as more upper-income taxpayers being eligible to receive the credit.
Among other changes, the Patient Protection and Affordable Care Act (ACA; P.L. 111-148) temporarily modified the adoption tax credit to make it refundable for two years (2010 and 2011). This change, combined with the credit's carryforward provision, may help to explain the steady growth in the number of tax returns claiming the credit through 2010 followed by the sharp drop in the number of returns making this claim for 2011. Specifically, until 2010, the adoption tax credit was nonrefundable, but taxpayers could 2010, the adoption tax credit was nonrefundable, but taxpayers could
credit for up to five years after initially claiming the credit. For example, if a taxpayer was credit for up to five years after initially claiming the credit. For example, if a taxpayer was
eligible for a $12,000 adoption credit, but their tax liability was $2,000 every year, the taxpayer eligible for a $12,000 adoption credit, but their tax liability was $2,000 every year, the taxpayer
would receive $2,000 of the adoption credit would receive $2,000 of the adoption credit
for five years. for five years.
than half of the maximum value of the credit. If these taxpayers were eligible for the maximum than half of the maximum value of the credit. If these taxpayers were eligible for the maximum
amount of the credit, they would need to carry forward the tax credit to future tax returns to amount of the credit, they would need to carry forward the tax credit to future tax returns to
receive the entire value of the credit. This may have resulted in the number of returns receiving receive the entire value of the credit. This may have resulted in the number of returns receiving
the adoption credit steadily increasing until 2010: every yearthe adoption credit steadily increasing until 2010: every year, taxpayers who received the adoption taxpayers who received the adoption
tax credit would include first-time recipients as well as recipients for previous years.tax credit would include first-time recipients as well as recipients for previous years.
2010 credit 2010 credit
carried forward to 2011. This may explain the steep drop in the number of carried forward to 2011. This may explain the steep drop in the number of
compared to 2010, illustrated compared to 2010, illustrated
of recipients of the credit began to increase, even though there is no evidence that the number of of recipients of the credit began to increase, even though there is no evidence that the number of
The Exclusion for Employer-Provided Adoption
Assistance Taxpayers whose employers offer qualifying adoption assistance programs as a fringe benefit Taxpayers whose employers offer qualifying adoption assistance programs as a fringe benefit
may not have to pay income taxes on some or all of the value of this benefit.may not have to pay income taxes on some or all of the value of this benefit.
amount that can be excluded from the taxpayeramount that can be excluded from the taxpayer
adoption which is the same maximum amount of the credit: $adoption which is the same maximum amount of the credit: $
provided adoption assistance and is in the 10% tax bracket, the exclusion results in $200 of provided adoption assistance and is in the 10% tax bracket, the exclusion results in $200 of
avoided income taxes. If a taxpayer is in the 35% tax bracket, the same $2,000 exclusion is worth avoided income taxes. If a taxpayer is in the 35% tax bracket, the same $2,000 exclusion is worth
$700 in tax savings. (By contrast, the tax credit reduces tax liability dollar for dollar of the value $700 in tax savings. (By contrast, the tax credit reduces tax liability dollar for dollar of the value
of the credit. For example, if a taxpayer had $2,000 of qualifying adoption expenses and applied of the credit. For example, if a taxpayer had $2,000 of qualifying adoption expenses and applied
those expenses toward the adoption credit, he or she could receive a credit of $2,000, irrespective those expenses toward the adoption credit, he or she could receive a credit of $2,000, irrespective
of the taxpayerof the taxpayer
claim both tax benefits for the same expenses. Hence, for one adoption, a taxpayer is eligible for claim both tax benefits for the same expenses. Hence, for one adoption, a taxpayer is eligible for
up to $up to $
(Taxpayers who claim both benefits for the same adoption must reduce the amount of qualified (Taxpayers who claim both benefits for the same adoption must reduce the amount of qualified
adoption expenses eligible for the credit by the amount of qualified adoption expenses excluded adoption expenses eligible for the credit by the amount of qualified adoption expenses excluded
under an employer-provided adoption assistance plan.) Combined, the maximum value of these under an employer-provided adoption assistance plan.) Combined, the maximum value of these
two tax benefits could equal up to $two tax benefits could equal up to $
2025 depending on a taxpayerdepending on a taxpayer
adoption assistance program at their work.adoption assistance program at their work.
for employer-provided adoption assistance is subject to the same income limitation (i.e., for employer-provided adoption assistance is subject to the same income limitation (i.e.,
phaseout)phaseout)
" Similar rules that apply to special needs children for the credit also apply for the exclusion. In Similar rules that apply to special needs children for the credit also apply for the exclusion. In
other words, if a taxpayer adopts a child with special needs and an employer has a qualified other words, if a taxpayer adopts a child with special needs and an employer has a qualified
adoption assistance program, the taxpayer will be able to exclude up to $adoption assistance program, the taxpayer will be able to exclude up to $
regardless of what the actual adoption expenses are and even if the taxpayer or the employer does regardless of what the actual adoption expenses are and even if the taxpayer or the employer does
not actually pay any qualified adoption expenses. The filing requirements for the exclusion are not actually pay any qualified adoption expenses. The filing requirements for the exclusion are
the same as for the credit. Finally, the same timing rules that apply to the adoption credit for the same as for the credit. Finally, the same timing rules that apply to the adoption credit for
domestic versus international adoption also apply to the exclusion. Thus, in order for the domestic versus international adoption also apply to the exclusion. Thus, in order for the
employer-provided adoption benefits to be excludable from income (and hence not taxable) for an employer-provided adoption benefits to be excludable from income (and hence not taxable) for an
international adoption, the amounts paid under the adoption assistance program must be paid international adoption, the amounts paid under the adoption assistance program must be paid
either during or after the year the adoption becomes final (either during or after the year the adoption becomes final (
all of the following requirements to be excludable from an employeeall of the following requirements to be excludable from an employee
- 1. The employer must provide notice of the plan to eligible employees.
- 2. The plan must not discriminate in favor of highly compensated employees.37
- 3. Employees must provide reasonable substantiations of qualifying expenses.
these plans.these plans.
comparable to the data on the adoption tax credit—are unavailable.comparable to the data on the adoption tax credit—are unavailable.
A survey of employers conducted by the International Foundation of Employee Benefit Plans found that 20% of responding employers said they offered financial assistance with adoption. This figure represents an increase from 12% in 2014.38 Legislative History of the Credit and Exclusion
Before the enactment of the adoption tax credit and exclusion for employer-provided adoption Before the enactment of the adoption tax credit and exclusion for employer-provided adoption
assistance in the mid-1990s, Congress enacted an itemized deduction for adoption expenses assistance in the mid-1990s, Congress enacted an itemized deduction for adoption expenses
associated with the adoption of a special needs child as part of the Economic Recovery Tax Act of associated with the adoption of a special needs child as part of the Economic Recovery Tax Act of
1981 (P.L. 97-341981 (P.L. 97-34).39
tax benefit:tax benefit:
A summary of enacting legislation and major legislative changes is provided below. For brevity, A summary of enacting legislation and major legislative changes is provided below. For brevity,
laws that made technical corrections or minor changes are not discussed.laws that made technical corrections or minor changes are not discussed.
42 The Small Business and Job Protection Act of 1996 (P.L. 104-188)
and an exclusion for employer-provided adoption assistance that went into effect in 1997. and an exclusion for employer-provided adoption assistance that went into effect in 1997.
Between 1997 and 2001, the adoption credit was available to special needs and non-special needs Between 1997 and 2001, the adoption credit was available to special needs and non-special needs
qualifying expenses that could be applied toward the credit was $5,000, or $6,000 for expenses qualifying expenses that could be applied toward the credit was $5,000, or $6,000 for expenses
associated with the adoption of a special needs child. The credit phased out proportionally for associated with the adoption of a special needs child. The credit phased out proportionally for
taxpayers with AGI between $75,000 and $115,000. (Neither the maximum amount of the credit taxpayers with AGI between $75,000 and $115,000. (Neither the maximum amount of the credit
nor the phaseout levels were annually adjusted for inflation under this law.) Qualifying adoption nor the phaseout levels were annually adjusted for inflation under this law.) Qualifying adoption
expenses, rules related to international adoptions, the five-year carryforward, the definition of a expenses, rules related to international adoptions, the five-year carryforward, the definition of a
special needs adoption, and the definition of an eligible child were effectively the same as they special needs adoption, and the definition of an eligible child were effectively the same as they
are under current law. Notably, beginning in 2002, the credit would only be available for special are under current law. Notably, beginning in 2002, the credit would only be available for special
needs adoptions. Effectively, the $5,000 credit available for adoptions that were not special needs needs adoptions. Effectively, the $5,000 credit available for adoptions that were not special needs
adoptions was scheduled to expire at the end of 2001.adoptions was scheduled to expire at the end of 2001.
into effect beginning in 1997. The maximum amount of the exclusion, like the credit, was limited into effect beginning in 1997. The maximum amount of the exclusion, like the credit, was limited
to $5,000, or $6,000 for special needs adoptions, and the amount that could be excluded phased to $5,000, or $6,000 for special needs adoptions, and the amount that could be excluded phased
out for taxpayers with AGI between $75,000 and $115,000. (Neither the maximum amount of the out for taxpayers with AGI between $75,000 and $115,000. (Neither the maximum amount of the
exclusion nor the phaseout levels were annually adjusted for inflation under this law.) As under exclusion nor the phaseout levels were annually adjusted for inflation under this law.) As under
current law, many terms and definitions of the exclusion were identical to those of the credit. The current law, many terms and definitions of the exclusion were identical to those of the credit. The
exclusion—for both non-special needs and special needs adoptions—was scheduled to expire at exclusion—for both non-special needs and special needs adoptions—was scheduled to expire at
the end of 2001.the end of 2001.
financial barrier to adoption, and thus encourage more adoptions.financial barrier to adoption, and thus encourage more adoptions.
the time when the current tax benefits were enacted, at least eight House members had adopted the time when the current tax benefits were enacted, at least eight House members had adopted
one or more children and had personally experienced both the financial and bureaucratic burden one or more children and had personally experienced both the financial and bureaucratic burden
of adopting.of adopting.
foster care system, children who for the purposes of adoption tax benefits are often categorized as foster care system, children who for the purposes of adoption tax benefits are often categorized as
needs adoptions. As then-Representative Cardin stated:needs adoptions. As then-Representative Cardin stated:
45 It is very costly in our system to adopt children. Many parents are not able to do that because of the costs. So the central part of this bill is to remove that financial burden, to because of the costs. So the central part of this bill is to remove that financial burden, to
reduce it significantly on the outset, to make it possible for more children to be adopted. reduce it significantly on the outset, to make it possible for more children to be adopted.
Madam Speaker, I want to point out another feature of the bill, and that is special needs Madam Speaker, I want to point out another feature of the bill, and that is special needs
adoptions which are much more difficult children to place, that have disabilities, that are adoptions which are much more difficult children to place, that have disabilities, that are
older, and it is more difficult to place these children in permanent adoption circumstances. older, and it is more difficult to place these children in permanent adoption circumstances.
This bill recognizes that and provides additional incentives for special needs adoption. The Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16)
temporarily extended and expanded the adoption tax credit and the exclusion for employer-temporarily extended and expanded the adoption tax credit and the exclusion for employer-
provided adoption assistance. Specifically, from 2002 through 2010, the provided adoption assistance. Specifically, from 2002 through 2010, the
children (this amount was adjusted annually for inflation);children (this amount was adjusted annually for inflation);
actual expenses (this amount was adjusted annually for inflation occurring since actual expenses (this amount was adjusted annually for inflation occurring since
2002);2002);
the credit phased out for taxpayers with income between $150,000 and $190,000.the credit phased out for taxpayers with income between $150,000 and $190,000.
after-tax cost of adoption to affected taxpayers.after-tax cost of adoption to affected taxpayers.
Congress noted that many taxpayers incurred expenses above the previous maximums of $5,000 Congress noted that many taxpayers incurred expenses above the previous maximums of $5,000
and $6,000 for special needs adoptions. Ultimately, and $6,000 for special needs adoptions. Ultimately,
both the adoption credit and exclusion and expanding the numbers of taxpayers who qualify for both the adoption credit and exclusion and expanding the numbers of taxpayers who qualify for
the tax benefits will encourage more adoptions and allow more families to afford adoption.the tax benefits will encourage more adoptions and allow more families to afford adoption.
"50 The Patient Protection and Affordable Care Act (P.L. 111-148)
adoption tax credit and exclusion for 2010 and 2011. Specifically, the law made the adoption tax adoption tax credit and exclusion for 2010 and 2011. Specifically, the law made the adoption tax
credit refundable for these two years.credit refundable for these two years.
credit included in the ACA, justified making the credit refundable as a way to encourage adoption credit included in the ACA, justified making the credit refundable as a way to encourage adoption
among lower-income Americans who might not be able to afford adoption:among lower-income Americans who might not be able to afford adoption:
lower income people would have the opportunity for adoption, as well.lower income people would have the opportunity for adoption, as well.
The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation
Act of 2010 (P.L. 111-312)
111-312) extended the EGTRRA provisions for the credit and the exclusion through 2012, but 111-312) extended the EGTRRA provisions for the credit and the exclusion through 2012, but
allowed all the modifications made by the ACA to expire as scheduled at the end of 2011.allowed all the modifications made by the ACA to expire as scheduled at the end of 2011.
for inflation occurring since 2002.for inflation occurring since 2002.
The American Taxpayer Relief Act of 2012 (P.L. 112-240)
modifications to the credit and exclusion permanent.modifications to the credit and exclusion permanent.
Policy Considerations
There are several ways economists evaluate tax benefits, including adoption tax benefits. There are several ways economists evaluate tax benefits, including adoption tax benefits.
Specifically, economists may assess whether adoption tax benefits encourage adoptions, Specifically, economists may assess whether adoption tax benefits encourage adoptions, as well as the the
distribution of these benefits among taxpayersdistribution of these benefits among taxpayers
tax benefits go to upper-income Americans,tax benefits go to upper-income Americans,
of lower- and middle-income Americans adopt.of lower- and middle-income Americans adopt.
tax credit tax credit claimants had income under $75,000, these taxpayers received one-fifth of adoption had income under $75,000, these taxpayers received one-fifth of adoption
credit credit dollars (22 (22
of adoption tax credit dollars going to those with income between $100,000 and $200,000. While of adoption tax credit dollars going to those with income between $100,000 and $200,000. While
comparable data are not available for the exclusion of employer-provided adoption benefits, comparable data are not available for the exclusion of employer-provided adoption benefits,
exclusions generally tend to provide the largest tax savings to those paying the highest marginal exclusions generally tend to provide the largest tax savings to those paying the highest marginal
tax rates (i.e., upper-income taxpayers).tax rates (i.e., upper-income taxpayers).
by some economists to be unfair (or inequitable). For example, the principle of unfair (or inequitable). For example, the principle of vertical equity implies that taxpayers with implies that taxpayers with
greater income, and hence more economic resources, should pay more in tax. The principal of greater income, and hence more economic resources, should pay more in tax. The principal of
vertical equity underpins the progressive nature of the federal income tax code, where those with vertical equity underpins the progressive nature of the federal income tax code, where those with
more income pay a greater share of that income in taxes through higher tax rates. Under the more income pay a greater share of that income in taxes through higher tax rates. Under the
definition of vertical equity, adoption tax benefits which primarily benefit higher-income definition of vertical equity, adoption tax benefits which primarily benefit higher-income
taxpayers would lessen the progressivity of the federal income tax and hence be inequitable.taxpayers would lessen the progressivity of the federal income tax and hence be inequitable.
equity.equity.
amount in taxes. Many economists consider taxpayers to be similar if they have similar levels of . Many economists consider taxpayers to be similar if they have similar levels of
income.income.
taxpayers with the same income paying different amounts in taxes, depending on their taxpayers with the same income paying different amounts in taxes, depending on their
characteristics such as whether they own a home (the mortgage interest deduction), send a child characteristics such as whether they own a home (the mortgage interest deduction), send a child
to college (higher education tax benefits), or adopt (adoption tax benefits).to college (higher education tax benefits), or adopt (adoption tax benefits).
The IRS increased its enforcement activities surrounding the adoption tax credit in tax years 2010 and 2011, when that credit was refundable. These activities may have prevented some inappropriate claims but also imposed an administrative burden on appropriate claimants.56
In 2012—when the IRS was In 2012—when the IRS wasprocessing mostly 2011 income tax returns and the adoption tax credit was refundable—they processing mostly 2011 income tax returns and the adoption tax credit was refundable—they
selected 69% of returns with adoption tax credit claims for audit. In most cases, these returns selected 69% of returns with adoption tax credit claims for audit. In most cases, these returns
were selected because the IRS flagged the required adoption documentation as missing, invalid, were selected because the IRS flagged the required adoption documentation as missing, invalid,
or insufficient. However, after auditing these returns the IRS or insufficient. However, after auditing these returns the IRS
and one half percent—in adoption credit claims.and one half percent—in adoption credit claims.
large proportion of returns for audit—even when so few dollars of benefits were improperly large proportion of returns for audit—even when so few dollars of benefits were improperly
claimed—was the IRSclaimed—was the IRS
Advocate (TAS) Advocate (TAS)
whether a child is considered to have special needs is also a state-based decision. The result whether a child is considered to have special needs is also a state-based decision. The result
is a variety of documentation that may meet the requirements for the adoption credit. As is a variety of documentation that may meet the requirements for the adoption credit. As
we have seen with the Earned Income Tax Credit (EITC), when taxpayers are required to we have seen with the Earned Income Tax Credit (EITC), when taxpayers are required to
provide non-standardized documentation to establish eligibility, it often leads to problems provide non-standardized documentation to establish eligibility, it often leads to problems
for both taxpayer and the IRS.for both taxpayer and the IRS.
fundamental challenges with having the IRS—which is focused on collecting revenue—fundamental challenges with having the IRS—which is focused on collecting revenue—
administer a social policy administer a social policy
such as an encouraging adoption. Policy Options
Adoption tax benefits wereAdoption tax benefits were
American children in the foster care system. More recently, Congress temporarily made the credit American children in the foster care system. More recently, Congress temporarily made the credit
refundable for 2010 and 2011, expanding eligibility for the credit to lower- and middle-income refundable for 2010 and 2011, expanding eligibility for the credit to lower- and middle-income
taxpayers. Congress may in the future seek further modifications to the credit or exclusion for taxpayers. Congress may in the future seek further modifications to the credit or exclusion for
employer-provided adoption assistance to achieve certain policy goals. Some of these options are employer-provided adoption assistance to achieve certain policy goals. Some of these options are
discussed below. Replace the Current Tax Benefits with a Direct Spending Program
Given that there is little evidence Given that there is little evidence
interested in eliminating these benefits and replacing them with direct spending on adoption, interested in eliminating these benefits and replacing them with direct spending on adoption,
especially if it views a direct spending program as more effective at encouraging adoptions. especially if it views a direct spending program as more effective at encouraging adoptions.
Alternatively, Congress could eliminate adoption tax benefits and direct any additional revenue to Alternatively, Congress could eliminate adoption tax benefits and direct any additional revenue to
deficit reduction.deficit reduction.
59 Make the Credit and Exclusion
Larger Congress could modify the benefits in a variety of ways to make them larger. For example, they Congress could modify the benefits in a variety of ways to make them larger. For example, they
could increase the credit and exclusion percentage from 100% to 200% of qualifying expenses, could increase the credit and exclusion percentage from 100% to 200% of qualifying expenses,
doubling the amount of the credit and exclusion. Alternatively, Congress could increase (or doubling the amount of the credit and exclusion. Alternatively, Congress could increase (or
eliminate) the current statutory cap on the value of the benefits ($eliminate) the current statutory cap on the value of the benefits ($
benefits were closer to the actual adoption costs. While this would increase the value of adoption benefits were closer to the actual adoption costs. While this would increase the value of adoption
tax benefits for many taxpayers, it is still unclear if it would encourage more adoptions. While tax benefits for many taxpayers, it is still unclear if it would encourage more adoptions. While
there is some evidence that the type of adoption is influenced by cost (i.e., families may pursue a there is some evidence that the type of adoption is influenced by cost (i.e., families may pursue a
domestic foster care adoption due to cost versus a more expensive international adoption), there is domestic foster care adoption due to cost versus a more expensive international adoption), there is
little evidence of any effect of adoption tax benefits on the decision to adopt. In addition, little evidence of any effect of adoption tax benefits on the decision to adopt. In addition,
increasing the size of adoption tax benefits will increase the total cost of adoption tax benefits. increasing the size of adoption tax benefits will increase the total cost of adoption tax benefits.
Data from the IRS indicate that on Data from the IRS indicate that on
Make the Credit Refundable
Congress could choose to make the adoption tax credit refundable, so that taxpayers with little or Congress could choose to make the adoption tax credit refundable, so that taxpayers with little or
no tax liability could claim the entire value of the credit in a given year. As previously discussed, no tax liability could claim the entire value of the credit in a given year. As previously discussed,
under current law, the adoption tax credit is nonrefundable, meaning the value of the credit under current law, the adoption tax credit is nonrefundable, meaning the value of the credit
claimed in any year cannot exceed income taxes owed in that year. In effect, tax liability acts as a claimed in any year cannot exceed income taxes owed in that year. In effect, tax liability acts as a
cap on the value of a nonrefundable tax credit. However, unlike other nonrefundable credits for cap on the value of a nonrefundable tax credit. However, unlike other nonrefundable credits for
individuals, the amount of the credit in excess of income taxes owed in a given year may be individuals, the amount of the credit in excess of income taxes owed in a given year may be
carried forward and claimed for up to five years after initially claimed. The adoption tax credit carried forward and claimed for up to five years after initially claimed. The adoption tax credit
was temporarily refundable for two years—2010 and 2011—which may provide some insights was temporarily refundable for two years—2010 and 2011—which may provide some insights
into the benefits and costs of making this credit refundable.into the benefits and costs of making this credit refundable.
income taxpayers may consider making the adoption tax credit refundable. income taxpayers may consider making the adoption tax credit refundable.
Table 3 illustrates that when the credit was refundable in 2011, a higher share of the total credits went to lower-income groups relative to the years in which it was not refundable. This would promote equity among taxpayers at different income levels who are able to adopt. Table 3. Distribution of Adoption Tax Credit Dollars
Adjusted Gross Income (AGI)
Total
Received as Refund
Not Received as Refund
Under $30k
24.6%
24.6%
0.0%
0.4%
$30k to under $50k
11.6%
10.9%
0.8%
4.6%
$50k to under $75k
21.3%
17.8%
3.5%
16.9%
$75k to under $100k
8.7%
4.7%
4.0%
16.1%
$100k to under $200k
33.1%
10.2%
22.9%
53.3%
$200k and over
0.5%
0.0%
0.5%
8.8%
Total
100.0%
68.3%
31.7%
100%
Notes: The most recent year the adoption tax credit was refundable was 2011. Hence, in 2011 the taxpayer The most recent year the adoption tax credit was refundable was 2011. Hence, in 2011 the taxpayer
could receive the entire value of the credit, irrespective of tax liability. In could receive the entire value of the credit, irrespective of tax liability. In
credit in excess of tax liability in credit in excess of tax liability in
credit and result in current claimants receiving the full value of the credit sooner, instead of credit and result in current claimants receiving the full value of the credit sooner, instead of
carrying the credit forward for up to five years. As previously discussed and illustrated carrying the credit forward for up to five years. As previously discussed and illustrated
less than the maximum amount of the credit. Given that adoption expenses tend to exceed the less than the maximum amount of the credit. Given that adoption expenses tend to exceed the
maximum credit amount, many of these taxpayers may have carried the adoption credit forward maximum credit amount, many of these taxpayers may have carried the adoption credit forward
on subsequent tax returns. This would require diligent record keeping on the part of taxpayers on subsequent tax returns. This would require diligent record keeping on the part of taxpayers
until they had claimed the total credit amount or they had exhausted the five-year time limit of the until they had claimed the total credit amount or they had exhausted the five-year time limit of the
carryforward, whichever came first. It would also mean that among those taxpayers who carried carryforward, whichever came first. It would also mean that among those taxpayers who carried
forward the credit, there could be a significant lag between when adoption expenses were forward the credit, there could be a significant lag between when adoption expenses were
incurred and when the credit for those expenses was actually claimed. For example, if a taxpayer incurred and when the credit for those expenses was actually claimed. For example, if a taxpayer
incurred $10,000 in legal expenses in incurred $10,000 in legal expenses in
expenses until their expenses until their
domestic foster care system, an often-repeated goal of these tax benefits (see domestic foster care system, an often-repeated goal of these tax benefits (see "
of the Credit and Exclusion
greater share of adoptions among low-income taxpayers—who would likely not be eligible for a greater share of adoptions among low-income taxpayers—who would likely not be eligible for a
nonrefundable credit—than higher-income taxpayers. One study nonrefundable credit—than higher-income taxpayers. One study from 2009 found that found that
accounted for about 10 percent of the adoptions completed by filers with incomes over $100,000, accounted for about 10 percent of the adoptions completed by filers with incomes over $100,000,
compared with more than 25 percent of the adoptions completed by filers with incomes below compared with more than 25 percent of the adoptions completed by filers with incomes below
$50,000.$50,000.
18% of adoptions among all tax filers.18% of adoptions among all tax filers.
taxpayers claiming the credit as well as pose administrative challenges to the IRS. Insofar as taxpayers claiming the credit as well as pose administrative challenges to the IRS. Insofar as
policymakers remain concerned about the improper payments of refundable tax credits,policymakers remain concerned about the improper payments of refundable tax credits,
may seek ways to prevent taxpayers from either mistakenly or fraudulently claiming the adoption may seek ways to prevent taxpayers from either mistakenly or fraudulently claiming the adoption
tax credit. Depending on the processes used to reduce improper payments, taxpayer burden could tax credit. Depending on the processes used to reduce improper payments, taxpayer burden could
increase, as could administrative difficulties for the IRS. For example, when the adoption tax increase, as could administrative difficulties for the IRS. For example, when the adoption tax
credit was temporarily refundable, the IRS required taxpayers claiming the credit to file a paper credit was temporarily refundable, the IRS required taxpayers claiming the credit to file a paper
return (they could previously e-file), and include both IRS Form 8839 as well as specific return (they could previously e-file), and include both IRS Form 8839 as well as specific
adoption-related documentation, which varied based on whether the adoption was international or adoption-related documentation, which varied based on whether the adoption was international or
domestic, final or not final, and of a child with special needs or not.domestic, final or not final, and of a child with special needs or not.
if no other modifications to the credit were made (like reducing the maximum credit amount). As if no other modifications to the credit were made (like reducing the maximum credit amount). As
illustrated illustrated
the credit was refundable—and 2011 ($610 million) was nearly four times and two times, the credit was refundable—and 2011 ($610 million) was nearly four times and two times,
respectively, the average annual aggregate credit amount between 2002 and 2009 (approximately respectively, the average annual aggregate credit amount between 2002 and 2009 (approximately
$325 million per year). Some of the increased cost in 2010 may have been a result of taxpayers $325 million per year). Some of the increased cost in 2010 may have been a result of taxpayers
with unused with unused
opposed to carrying it forward after 2010.62
Figure 3. Total Dollar Amount of Adoption Tax Credits Claimed, 1997-2022
Source: Internal Revenue Service, Statistics of Income, Individual Complete Report (Publication 1304), Table A and Table 3.3.
Note: Dollars are nominal dollars.
Taken as a whole, the 2010 and 2011 data provide some indication as to the range of the cost of making the credit refundable with no alterations to the formula. Policymakers could also make the credit refundable and adjust the credit formula (and the phaseout income level) to reduce the budgetary cost of refundability. The Office of Management and Budget projected that a proposal in President Biden's FY2025 budget request to make the credit refundable and make certain guardianship arrangements qualify would reduce revenues by $12 billion from FY2025 to FY2034.63
Provide Parity Between Different Types of Adoptions for theCredit and Exclusion
As previously discussed, the legislative history indicates that Congress intended to provide the As previously discussed, the legislative history indicates that Congress intended to provide the
largest tax benefits to taxpayers adopting children from the U.S. foster care system. Insofar as this largest tax benefits to taxpayers adopting children from the U.S. foster care system. Insofar as this
policy goal changes, Congress may modify adoption tax benefits to provide parity between policy goal changes, Congress may modify adoption tax benefits to provide parity between
different types of adoption. For example, if Congress was interested in encouraging more different types of adoption. For example, if Congress was interested in encouraging more
international adoptions, it could change the timing rules of international adoptions to be identical international adoptions, it could change the timing rules of international adoptions to be identical
to domestic adoptions. Currently, taxpayers who adopt a child from abroad can only claim tax to domestic adoptions. Currently, taxpayers who adopt a child from abroad can only claim tax
benefits once the adoption is finalized, unlike those who adopt domestically, who can claim benefits once the adoption is finalized, unlike those who adopt domestically, who can claim
benefits the year after expenses are incurred (seebenefits the year after expenses are incurred (see Table 1). In addition, Congress could modify . In addition, Congress could modify
the definition of the definition of
adoption or internationally, allowing more families to claim the maximum benefit regardless of adoption or internationally, allowing more families to claim the maximum benefit regardless of
actual expenses incurred.actual expenses incurred.
Allow Adoptive Parents to Submit a Third-Party Affidavit to Verify
an Adoption
As previously discussed, when the credit became refundable, the IRS required taxpayers to file a As previously discussed, when the credit became refundable, the IRS required taxpayers to file a
paper tax return with copies of adoption documentation. While this policy was intended to help paper tax return with copies of adoption documentation. While this policy was intended to help
the IRS verify adoption claims, the IRS, according to the Taxpayer Advocate, seemed unfamiliar the IRS verify adoption claims, the IRS, according to the Taxpayer Advocate, seemed unfamiliar
with the enormous varieties of documentation, and flagged many returns erroneously for audit. with the enormous varieties of documentation, and flagged many returns erroneously for audit.
One potential solution that Congress may consider is allowing taxpayers to use a standard third-One potential solution that Congress may consider is allowing taxpayers to use a standard third-
attest to the adoption. This would also provide IRS examiners with one standardized document to attest to the adoption. This would also provide IRS examiners with one standardized document to
verify, potentially reducing confusion among IRS examiners, and burden among taxpayers. verify, potentially reducing confusion among IRS examiners, and burden among taxpayers.
Convert the Exclusion for Employer-Provided Adoption Assistance
into a Deduction
The exclusion for adoption assistance is only available to taxpayers whose employers provide The exclusion for adoption assistance is only available to taxpayers whose employers provide
adoption assistance benefits. One option to expand the availability of this benefit is to convert the adoption assistance benefits. One option to expand the availability of this benefit is to convert the
exclusion into a deduction that could be claimed regardless of whether adoption assistance was exclusion into a deduction that could be claimed regardless of whether adoption assistance was
provided as an employee benefit. For example, the exclusion could be converted to an provided as an employee benefit. For example, the exclusion could be converted to an
the-linethe-line
or not. The same formula for the credit and income phaseouts could apply. While this policy or not. The same formula for the credit and income phaseouts could apply. While this policy
change might expand the availability of this benefit, it would also likely increase the cost of the change might expand the availability of this benefit, it would also likely increase the cost of the
provision and complexity for taxpayers, who could now claim both a credit and deduction for provision and complexity for taxpayers, who could now claim both a credit and deduction for
their expenses. In addition, the value of the deduction in terms of tax savings—like the their expenses. In addition, the value of the deduction in terms of tax savings—like the
exclusion—depends on the taxpayerexclusion—depends on the taxpayer
taxpayer up to $500 in the 10% tax bracket, but $1,750 if he or she is in the 35% bracket. In other taxpayer up to $500 in the 10% tax bracket, but $1,750 if he or she is in the 35% bracket. In other
words, deductions and exclusions tend to provide the greatest tax savings to the highest-income words, deductions and exclusions tend to provide the greatest tax savings to the highest-income
taxpayers. Appendix
the Adoption Credit
Below is an illustrative example of how a taxpayer who incurs $20,000 in adoption expenses Below is an illustrative example of how a taxpayer who incurs $20,000 in adoption expenses
would claim the adoption tax credit using the carryforward. For simplicity, this example is a would claim the adoption tax credit using the carryforward. For simplicity, this example is a
domestic private adoption (i.e., domestic private adoption (i.e.,
assumed that the taxpayerassumed that the taxpayer
maximum credit.maximum credit.
Table A-1. Calculating the Adoption Tax Credit for $20,000 of Adoption Expenses
2023
2021
2022
2023
2024
2025
Was the adoption finalized?
No
No
Yes
NA
NA
$14,440
$14,890
$15,950
$16,810
$17,280
(statutory amount – credit already claimed for the adoption in previous years)
Credit cannot be claimed this year
$14,890
$11,950
($15,950-$4,000)
$7,810
($16,810-$4,000-$5,000)$3,280
($17,280-$4,000-$5,000-$5,000)(3) Qualifying expenses incurred during the year
$5,000
$15,000
$0
$0
$0
year new expenses to claim the credit
$0
$5,000
$0
$0
expenses carried forward from previous years
(8)
$0
$0
$1,000
$9,950
$2,810
total
$0
$5,000
$16,000
$9,950
$2,810
(the lesser of the maximum credit that can be claimed by
the taxpayer (2) or the maximum expenses(4))
$0
$5,000
$15,950
$7,810
$2,810
(6) Income Tax Liability
$4,000
$4,000
$5,000
$5,000
$5,000
income tax liability(6))
$0
$4,000
$5,000
$5,000
$2,810
the calculated amount of the credit
$0
$1,000
$9,950
$2,810
$0
Source: CRS calculations.
cannot be claimed on his or her cannot be claimed on his or her
the adoption is not yet finalized, the expenses can be applied toward claiming the adoption tax the adoption is not yet finalized, the expenses can be applied toward claiming the adoption tax
credit the year credit the year after they are incurred.) they are incurred.)
tax credit for that year. However, in tax credit for that year. However, in
can carry forward the difference of $can carry forward the difference of $
2022 as well as the $as well as the $
expenses. (The $15,000 of expenses incurred in expenses. (The $15,000 of expenses incurred in
's 2023 return because the adoption is finalized in return because the adoption is finalized in
can claim in can claim in
claimed). As a result of the $claimed). As a result of the $
and carry forward the difference of $and carry forward the difference of $
apply the carried-forward expenses of $apply the carried-forward expenses of $
amount of the credit that can be claimed in amount of the credit that can be claimed in
$6,000 of credit already claimed). However, in $6,000 of credit already claimed). However, in
so the actual amount of the adoption tax credit the taxpayer can claim in so the actual amount of the adoption tax credit the taxpayer can claim in
taxpayer can carry forward the difference of $3,taxpayer can carry forward the difference of $3,
on a tax return in on a tax return in
2025 is $1,280 (the statutory maximum minus the $(the statutory maximum minus the $
's income tax liability is $income tax liability is $
claim in 2016 is $claim in 2016 is $
the adoption credit over four years (the adoption credit over four years (
2025).
A prior version of this report was authored by Margot Crandall-Hollick, former CRS Specialist in Public Finance. Emilie Stoltzfus, CRS Specialist in Social Policy, contributed to this report.
Footnotes
For more information on the changes made to the tax code by P.L. 115-97, see CRS Report R45092, The 2017 Tax Revision (P.L. 115-97): Comparison to 2017 Tax Law, coordinated by Molly F. Sherlock and Donald J. Marples.
For information about other federal programs that support adoption, see discussion of "Adoption Assistance" (Title IV-E of the Social Security Act), "Adoption Incentives," and "Adoption Opportunities" in CRS Report R43458, Child Welfare: An Overview of Federal Programs and Their Current Funding, by Emilie Stoltzfus.
State child welfare agencies are required to report data to the Department of Health and Human Services (HHS) via the Adoption and Foster Care Analysis and Reporting System (AFCARS) established pursuant to Section 479 of the Social Security Act (42 U.S.C. §679). HHS uses these data to compile an annual number of adoptions with public child welfare agency involvement.
For the purpose of this report, this category includes what HHS categorized in Trends in U.S. Adoptions, 2010-2019 as "other" adoptions—that is, adoptions that are neither domestic public agency nor international adoptions. This category includes private agency adoptions, tribal adoptions, and adoptions of a spouse's child, that is, stepchild adoptions. (Stepchild adoptions do not qualify for the credit or exclusion.)
The Internal Revenue Code (IRC) refers to international adoptions as foreign adoptions, while the State Department refers to international adoptions as intercountry adoptions.
The State Department records the number of intercountry adoptions through its visa reporting system. Under the Intercountry Adoption Act of 2000, it is required to annually report to Congress on the number of intercountry adoptions (42 U.S.C. §14914(b)(1)).
HHS, Administration for Children and Families (ACF), Children's Bureau, Trends in U.S. Adoptions, 2010-2019, Child Welfare Information Gateway, April 2022, https://www.childwelfare.gov/resources/trends-us-adoptions-2010-2019/ (cited hereinafter as Trends in U.S. Adoptions, 2010-2019).
Trends in U.S. Adoptions, 2010-2019, p. 14
HHS, ACF, Children's Bureau, Trends in U.S. Adoptions, 2008-2012, p. 3. This report includes summary information on 2005 adoptions.
See "History of Data Sources," in Trends in U.S. Adoptions, 2010-2019, p. 3.
These data are collected by federal fiscal year, which runs from October 1 of the calendar year preceding the fiscal year through September 30 of the calendar year. So, for example, 2022 data include any adoption completed on October 1, 2021, through September 30, 2022.
For 2023, the number of international adoptions declined to fewer than 1,300. These data are also collected by fiscal year. State Department, "Adoption Statistics Dashboard," https://travel.state.gov/content/travel/en/Intercountry-Adoption/adopt_ref/adoption-statistics-esri.html. See also the State Department's annual reports to Congress on intercountry adoptions, https://travel.state.gov/content/travel/en/Intercountry-Adoption/adopt_ref/AnnualReports.html.
Estimates for 2001 included in HHS, ACF, Children's Bureau, Trends in Adoptions 2008-2012, p. 14. https://cwig-prod-prod-drupal-s3fs-us-east-1.s3.amazonaws.com/public/documents/adopted0812.pdf.
Trends in U.S. Adoptions, 2010-2019.
Abigail Rose Drumm et al., Adoption by the Numbers, 2021&2022, National Council for Adoption, 2025, p. 7, https://adoptioncouncil.org/wp-content/uploads/2025/03/Adoption-by-the-Numbers-2025.pdf.
HHS, ACF, Planning for Adoption: Knowing the Costs and Resources, Factsheet for Families, June 2022, https://www.govinfo.gov/content/pkg/GOVPUB-HE23_1200-PURL-gpo212419/pdf/GOVPUB-HE23_1200-PURL-gpo212419.pdf.
Income for the purposes of the phaseout of the adoption tax credit is defined as adjusted gross income (AGI) without regard to IRC §911, §931, and §933.
The adoption tax credit can offset the alternative minimum tax (AMT). For more information about the AMT, see CRS Report R44494, The Alternative Minimum Tax for Individuals: In Brief, by Donald J. Marples.
Internal Revenue Code (IRC) §23(d)(1)(A).
IRC §23(d)(2).
Internal Revenue Service (IRS), "Cumulative Bulletin Notice 97-9," December 31, 1996.
See IRS, "Adoption Credit," https://www.irs.gov/credits-deductions/individuals/adoption-credit.
IRC §23(d)(1)(B) and IRC §23(d)(1)(C); and IRS, "Adoption Credit," https://www.irs.gov/credits-deductions/individuals/adoption-credit.
For more information on the adoption taxpayer identification number (ATIN), see "Adoption Taxpayer Identification Number" at https://www.irs.gov/individuals/adoption-taxpayer-identification-number.
IRC §23(f)(1). If a married person has been living apart from his or her spouse for the last six months of the year, the child lived in the person's home for more than six months of the year, and the person has paid more than one-half of the cost of his or her home, then the married person may claim the adoption tax credit with a married filing separate status.
IRS, "Answers to Frequently Asked Questions for Registered Domestic Partners and Individuals in Civil Unions," September 13, 2024, http://www.irs.gov/uac/Answers-to-Frequently-Asked-Questions-for-Registered-Domestic-Partners-and-Individuals-in-Civil-Unions.
According to the IRS, the per adoption dollar limitation of the adoption credit requires the taxpayer to combine the qualified adoption expenses if the taxpayer made more than one attempt to adopt an eligible child. For example, if a taxpayer planned to adopt one U.S. child and paid $10,000 and that attempt failed, and the taxpayer then paid $6,000 to adopt a different child and that adoption succeeded, the taxpayer's $16,000 of adoption expenses would be subject to the annual limit per child ($14,300 in 2020). See IRS Notice 2010-66, https://www.irs.gov/pub/irs-drop/n-10-66.pdf, and IRS Notice 97-9, https://www.irs.gov/pub/irs-irbs/irb97-02.pdf.
An international adoption for the purposes of the adoption tax credit is defined as the adoption of a child who is not a citizen or resident of the United States. For the purposes of the adoption tax credit, the "United States" includes the U.S. possessions. See IRC §217(h)(3).
For example, if a taxpayer was eligible to claim a $5,000 adoption credit for the adoption of one child and a $10,000 adoption credit for the adoption of another child in 2025, he or she could claim a total of $15,000 of the adoption tax credit. The maximum credit for two adopted children in 2025 would be $34,560 (2 x $17,280).
For the purposes of the adoption tax credit, modified adjusted gross income (MAGI) is adjusted gross income (AGI) plus excluded foreign earned income and excluded income of bona fide residents of Guam, CNMI, American Samoa, and Puerto Rico.
The definition of special needs for the federal adoption assistance program can be found in §473(c) (42 U.S.C. 673(c)) of the Social Security Act. Title IV-E adoption assistance is primarily an ongoing monthly subsidy paid to adoptive families on behalf of special needs adoptive children. For more information, see CRS Report R43458, Child Welfare: An Overview of Federal Programs and Their Current Funding, by Emilie Stoltzfus.
For more information, see Joint Committee on Taxation, Description of the Tax Provisions of the Chairman's Amendment in the Nature of a Substitute to the Budget Reconciliation Legislative Recommendations Related to Tax, JCX-21-25, p. 82, May 12, 2025, https://www.jct.gov/publications/2025/jcx-21-25/.
CRS analysis of state-reported data available from the National Data Archive on Child Abuse and Neglect at Cornell University (NDACAN), Adoption and Foster Care Analysis and Reporting System (AFCARS) Ad2017v5, Ad2018v3, Ad2019v2, and Ad2020v1, found that the share of adoptions carried out with public child welfare agency involvement (i.e., domestic public adoptions) and determined to have special needs was 86.3% in FY2016 and had climbed to 89.8% by FY2020.
States are allowed to use these or any other category to determine their own special needs factors and those factors vary by state. Information by state can be found at Families Rising, "Adoption Assistance," https://wearefamiliesrising.org/adoption-assistance/.
Expenses paid or reimbursed under employer-provided adoption assistance are subject to Social Security and Medicare taxes as well as federal unemployment insurance taxes. They are not subject to income tax withholding. For more information see Table 2-1 in IRS, Employer's Tax Guide to Fringe Benefits, Publication 15-B, 2025, https://www.irs.gov/publications/p15b/ar02.html.
The definition of income used for the phaseout of the exclusion differs from the definition used when phasing out the adoption tax credit. See IRC §23(b)(2)(B), §137(b)(3).
In addition, the plan cannot pay more than 5% of its payments during the year for shareholders or owners (or their spouses or dependents).
Survey may not be representative of employers in the United States as a whole. Note also that the share of employers offering a benefit does not necessarily align with the number of employees receiving the benefit, since employers have different numbers of employees. Cara McMullin, "Organizations Adding More Fertility and Adoption Support," International Federation of Employee Benefit Plans, August 22, 2024, https://blog.ifebp.org/organizations-adding-more-fertility-and-adoption-support/.
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 costs, etc.) and authorized 50% federal matching funds to states for these purposes. Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1986, JCS-10-87, May 4, 1987, pp. 52-53 and pp.1350-1351. In regulation, the total amount of nonrecurring adoption expenses (per adoption) that may be federally matched under the Title IV-E program is capped at $2,000 (45 C.F.R. §1356.41(f)(1)). States spent less than $50 million (state and federal dollars) for this nonrecurring adoption assistance in each of three most recent years for which data are available (FY2021-FY2023), and claimed federal support for that assistance in each of those years of between $23 million and $24 million.
Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1986, JCS-10-87, May 4, 1987, p. 52.
These include P.L. 105-34, P.L. 105-206, P.L. 107-147, P.L. 108-311, P.L. 109-58, and P.L. 109-135.
One advocate, Sen. Arlen Specter, cited "cost hurdles that may discourage many American families from adopting a child" as one factor that led him to introduce legislation to "promote adoption through tax credits, to try to encourage those who are in the situation of unintended pregnancy to carry through to term." Sen. Specter, "The Adoption Promotion Act of 1996," Congressional Record, April 29, 1996, p. S4325.
Erika Niedowski, "Adoption experience changes views. Financial, emotional costs are high, but for many it's the only way to build a family," The Hill, May 15, 1996.
Rep. Cardin, "Adoption Promotion and Stability Act of 1996," Congressional Record, May 9, 1996, p. H4782.
Notably, qualified expenses paid or incurred before 2002 remain subject to the prior-law dollar limits. Joint Committee on Taxation, General Explanation of Tax Legislation in the 107th Congress, JCS-1-03, January 24, 2003, p. 21.
Inflation adjustment of the statutory dollar amounts of both the maximum credit and the income level at which the credit phases out began in 2003.
This provision went into effect beginning in 2003, not 2002. See P.L. 107-16, §202(g)(2).
Joint Committee on Taxation, General Explanation of Tax Legislation in the 107th Congress, JCS-1-03, January 24, 2003, p. 20.
Joint Committee on Taxation, General Explanation of Tax Legislation in the 107th Congress, JCS-1-03, January 24, 2003, p. 20.
Section 23 was redesignated as Section 36C and moved to the part of the tax code that includes other refundable tax credits.
Betty Nguyen et al., "Senate Democrats Obtain 60 Votes on Health Care Cloture; D.C. Snow Storm One of the Worst on Record for the Area," CNN Newsroom Transcript, December 19, 2009, 10:00 AM EST.
While beyond the scope of this report, depending on the type of adoption, some adoptive parents may be required to have a minimum level of income to be eligible to adopt. For example, according to HHS, "Prospective adoptive parents must be in good health and have adequate income to meet the needs of the child(ren) placed in their family. Home ownership is not required, but a history of stable residency in a home that can accommodate, comfortably and safely, all family members including the adopted child, is needed." Indeed, one reason for denying an adoption is "The applicant's income and/or financial skills are inadequate to provide for the family." HHS, ACF, Children's Bureau, Home Study Requirements for Prospective Parents in Domestic Adoption, September 2015, p. 2. Similarly, financial considerations are taken into account in international adoptions. For example, the chapter on adoption-related home studies in the United States Customs and Immigration Services (USCIS) policy manual stresses that prospective parents demonstrate that they have sufficient income to care for the adopted child. See Volume 5, Part B, Chapter 4, "Home Studies," in USCIS, Policy Manual, https://www.uscis.gov/policy-manual/volume-5-part-b-chapter-4#S-G.
While adoptive parents have a higher median income than nonadoptive parents, data indicate that adoption also occurs among the less affluent with "over 30% of all adopted children and over 45% of the children adopted from foster care living in households with income no higher than twice the poverty threshold." See Table 5 in Rose M. Kreider and Daphne A. Lofquist, Adopted Children and Stepchildren: 2010, U.S. Census Bureau, April 2014, p. 18, and Taxpayer Advocate Service, Most Serious Problems: The IRS's Compliance Strategy for the Expanded Adoption Credit Has Significantly and Unnecessarily Harmed Vulnerable Taxpayers, Has Increased Costs for the IRS, and Does Not Bode Well for Future Credit Administration, 2012 Annual Report to Congress Volume One, December 31, 2012, p. 112, http://www.taxpayeradvocate.irs.gov/2012-Annual-Report/downloads/Most-Serious-Problems-Adoption-Credit-Delays.pdf.
A clear definition of horizontal equity—or rather of a tax that is not horizontally equitable—can be found in a report by the Treasury Department for President Ronald Reagan, written in 1984:"A tax that places significantly different burdens on taxpayers in similar economic circumstances is not fair. For example, if two similar families have the same income, they should ordinarily pay roughly the same amount of income tax, regardless of the sources or uses of that income." Department of the Treasury, Tax Reform for Fairness, Simplicity, And Economic Growth, The Treasury Department Report to the President Volume 1, November 1984, p. 14.
For more information, see Government Accountability Office, Adoption Tax Credit: IRS Can Reduce Audits and Refund Delays, GAO-12-98, October 2011, https://www.gao.gov/products/gao-12-98.
Taxpayer Advocate Service, Most Serious Problems: The IRS's Compliance Strategy for the Expanded Adoption Credit Has Significantly and Unnecessarily Harmed Vulnerable Taxpayers, Has Increase Costs for the IRS, and Does Not Bode Well for Future Credit Administration, 2012 Annual Report to Congress Volume One, December 31, 2012, p. 120, http://www.taxpayeradvocate.irs.gov/2012-Annual-Report/downloads/Most-Serious-Problems-Adoption-Credit-Delays.pdf.
Taxpayer Advocate Service, Most Serious Problems: The IRS's Compliance Strategy for the Expanded Adoption Credit Has Significantly and Unnecessarily Harmed Vulnerable Taxpayers, Has Increased Costs for the IRS, and Does Not Bode Well for Future Credit Administration, 2012 Annual Report to Congress Volume One, December 31, 2012, p. 122, http://www.taxpayeradvocate.irs.gov/2012-Annual-Report/downloads/Most-Serious-Problems-Adoption-Credit-Delays.pdf.
See CRS Report R44383, Deficits, Debt, and the Economy: An Introduction, by Grant A. Driessen.
Rob Geen, The Adoption Tax Credit: Is it an Effective Approach to Promote Foster Care Adoption?, Child Trends, Research Brief, August 2007, http://www.childtrends.org/wp-content/uploads/2013/02/Child_Trends-2007_08_07_RB_AdoptionTaxCredit.pdf.
Policymakers have shown interest in reducing erroneous payments of refundable credits—including the EITC, the additional child tax credit, and the temporarily refundable adoption tax credit. For examples, see Treasury Inspector General for Tax Administration, Improper Payment Rates for Refundable Tax Credits Remain High, May 10, 2021, https://www.tigta.gov/sites/default/files/reports/2024-11/202140036fr.pdf, and Treasury Inspector General for Tax Administration, Processes to Address Erroneous Adoption Credits Result in Increased Taxpayer Burden and Credits Allowed to Nonqualifying Individuals, June 13, 2012, https://www.treasury.gov/tigta/auditreports/2012reports/201240065fr.pdf.
For example, if a taxpayer had $8,000 in carried forward credit and an average tax liability of $2,000 per year, they could claim that entire $8,000 amount in 2010. If instead the credit were nonrefundable, they would claim a $2,000 credit every year for four years. Notably, in the second year the credit was refundable—2011—the total amount of credit dollars claimed fell by half to $610 million in comparison to 2010. Thus, insofar as the increase in the total dollars claimed in 2010 was a result of unused "carryforward" credits being claimed during that year, the 2011 claims may more accurately reflect the cost of making the credit permanently refundable.
U.S. Department of the Treasury, General Explanation of the Administration's Revenue Proposals for Fiscal Year 2025, pp. 106-107 and 243, https://home.treasury.gov/system/files/131/General-Explanations-FY2025.pdf.