Order Code RL33633
Tax Benefits for Families: Adoption
Updated February 1, 2007
Emily Maureen Mickelson
Research Associate
Domestic Social Policy Division
Christine Scott
Specialist in Tax Economics
Domestic Social Policy Division

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Tax Benefits for Families: Adoption
Summary
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) provided an increase in qualified
expenses for the credit (and the income tax exclusion) to $10,000 (indexed for
inflation), but with a sunset period. Beginning in 2011, the prior law limits of $5,000
and $6,000 will become effective again.
The tax credit and the income tax exclusion significantly limit who may benefit
from the tax provisions. Both provisions are subject to a phase-out rule (which
creates an income cap), and the tax credit is nonrefundable (which creates a
minimum income level for using the credit). These provisions limit the number of
taxpayers who benefit from the credit. As a result, in tax year 2004, very few
families with an adjusted gross income of less than $25,000, or with an adjusted
gross income of $200,000 or more, claimed the credit. In tax year 2004,
approximately 71,100 tax returns, or .05% of all tax returns, included a claim for the
adoption tax credit, with a total credit value claimed of $301.9 million.
Policy issues associated with the tax provisions are the limited availability of the
credit resulting from the phase-out rule and nonrefundablity of the credit, more
generous provisions for domestic adoptions and for adoptions of special needs
children, and whether the tax system is the most efficient means of providing federal
assistance for adoption.
Legislation introduced in the 109th Congress would have made permanent the
EGTRRA increases in the tax provisions, increased the level of qualified expenses,
or made the credit refundable. In the 110th Congress, legislation has been introduced
(H.R. 273 and H.R. 471) that would repeal the EGTRRA sunset provision as it
relates to the adoption tax provisions. This report outlines the tax benefits for
adoption, examines the associated policy issues, and provides a legislative history of
the tax provisions for adoption. It will be updated as warranted by legislative
activity.

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Contents
Scope of Adoption
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Domestic Public Agency Adoptions . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Domestic Private Adoptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Intercountry Adoptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Overview of the Tax Credit and Income Tax Exclusion . . . . . . . . . . . . . . . . . . . . 3
The Adoption Tax Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Income Tax Exclusion for Employer Adoption Assistance . . . . . . . . . . 8
Policy Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Phaseout (Income Limitation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Nonrefundability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Impact of the Phaseout (Income Limit) and Nonrefundablity . . . . . . . 10
Federal/State Subsidies Versus Tax Incentives . . . . . . . . . . . . . . . . . . 13
Special Needs Children Versus Non-special Needs Children . . . . . . . 14
Domestic Adoptions Versus Intercountry Adoptions . . . . . . . . . . . . . 14
EGTRRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Legislative History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
The Small Business and Job Protection Act of 1996
(P.L. 104-188) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
The Taxpayer Relief Act of 1997 (P.L. 105-34) . . . . . . . . . . . . . . . . . 16
IRS Restructuring and Reform Act of 1998 (P.L. 105-206) . . . . . . . . 16
The Economic Growth and Tax Relief Reconciliation Act of
2001 (EGGTRA, P.L. 107-16) . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
The Job Creation and Workers Assistance Act of 2002 . . . . . . . . . . . 17
Legislation in the 109th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Legislation in the 110th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
List of Figures
Figure 1. Simulated Utilization of the Adoption Tax Credit by Type of
Adoption and Level of Adjusted Gross Income, Married Couple Adopting
One Child, Tax Year 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
List of Tables
Table 1. Examples of Qualifying and Non-qualifying Expenses . . . . . . . . . . . . . 5
Table 2. When Qualified Expenses Are Eligible: Domestic and
Intercountry Adoptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Table 3. Utilization of the Adoption Tax Credit, Tax Year 2004 . . . . . . . . . . . . 11

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Tax Benefits for Families: Adoption
States have paramount responsibility in setting policy to govern the process of
child adoption. Nonetheless, the federal government plays a significant — though
indirect — role in supporting adoption through grants to states that provide both one-
time and ongoing subsidies to parents of adoptive children with special needs and
through tax benefits that help offset the costs of adopting a child. This report focuses
primarily on the latter — the federal adoption tax credit and income tax exclusion for
employer-provided adoption assistance.
Scope of Adoption
There are several types of adoption, including domestic public agency adoption,
domestic private adoption, and intercountry adoption. With regard to each of these
types of adoption, the Department of Health and Human Services (HHS) collects data
on children adopted with the involvement of state child welfare agencies, and the
Department of State records the number of intercountry adoptions through its visa
reporting system. However, statistics on private adoptions are the least reliable or
consistent, because private agencies and individuals who facilitate independent
adoptions are not required to report data to either state or federal agencies.
The most recent data on all types of adoption, collected by the National Center
for State Courts (NCSC), indicate than an estimated 127,000 children were adopted
in 2001. This is approximately the same estimated number of adoptions as in 1992
and somewhat higher than the estimated 118,000 adoptions in 1987.1 According to
NCSC data, of adoptions in 2001, an estimated 46% were private (including tribal
and kinship, such as stepparent), 39% were intercountry, and 15% were public
agency adoptions. However, these percentages differ greatly from 1992, when an
estimated 77% of adoptions were private, 5% were intercountry, and 18% were
public agency adoptions.
1 Department of Health and Human Services (HHS), Administration for Children and
Families, Children’s Bureau, Child Welfare Information Gateway, How Many Children
Were Adopted in 2000 and 2001? (hereafter cited as Child Welfare Information Gateway,
How Many Children?). To obtain these data for inclusion in the cited estimate for the total
number of adoptions, the National Center for State Courts relied on various sources,
including direct contacts with state courts, public and private agencies, and state bureaus of
vital records. The Child Welfare Information Gateway is available at
[http://www.childwelfare.gov/].

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The tax provisions described in this report cover all types of adoption, except
for adoptions by stepparents. According to data for 1992 (the most recent available),
the majority of private adoptions (or 42% of total adoptions) were by stepparents.2
Domestic Public Agency Adoptions. Children in state foster care are
typically placed in either foster family homes, relative foster homes, group homes,
or institutional settings such as hospitals or residential treatment centers. On the last
day of FY2005, approximately 513,000 children were in foster care and 114,000 were
“waiting” to be adopted. (Foster children waiting to be adopted include those who
have a permanency goal of adoption and/or those whose parental rights have been
terminated.) During FY2005, 51,000 children were adopted with the involvement
of state child welfare agencies. These numbers reflect a decline over the past five
years among children in foster care and those awaiting adoption; however, the
number of children adopted in a given year was relatively steady during the five-year
period.3
Domestic Private Adoptions. Domestic private adoptions are facilitated
by state-licensed private agencies or through independent agreements in which an
individual arranges for another party to adopt his or her child.4 Like all adoptions,
private adoptions are finalized by state or tribal courts, but data on these adoptions
are not systematically collected or reported. Therefore, national data on private
adoptions are the least reliable or consistent. The most recent effort to count
domestic private adoptions was in 2001 when, as noted earlier, the National Center
on State Courts estimated them at 58,600 (or 46% of the estimated 127,000 adoptions
of all kinds) adoptions. The comparable estimate for FY1992 was 77% of the total
number of adoptions (also estimated at 127,000 for that year), or 97,700 adoptions.
Intercountry Adoptions. Intercountry (also called foreign or international)
adoptions are adoptions of non-citizen or resident children by families who are
citizens or legal residents of the United States.5 In FY2006, the Department of State
reported issuing 20,679 immigrant visas to orphans entering the United States.
Issuance of such a visa is a prerequisite for intercountry adoption by a U.S. citizen,
and the number of such visas is a considered a good proxy for the number of such
2 Child Welfare Information Gateway, How Many Children? Adoption by a stepparent may
be of any kind, but is assumed to be domestic private adoption in most cases.
3 U.S. Department of Health and Human Services, Administration for Children and Families,
Children’s Bureau, Trends in Foster Care and Adoption, FY2000-FY2005 (based on
AFCARS data submitted by states as of August 2006), available at
[http://www.acf.dhhs.gov/programs/cb/stats_research/afcars/trends.htm].
4 Evan B. Donaldson Adoption Institute, Adoption Facts (2006), see
[http://adoptioninstitute.org/research/adoptionfacts.php] (hereafter referred to as The
Adoption Institute: Adoption Facts).
5 For more information on intercountry adoptions, see CRS Report RL30979, Intercountry
Adoption Act of 2000 and Intercountry Adoptions, by Alison Siskin.

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adoptions. The comparable number of visas in FY2000 was 17,718; in FY1990, the
number of such visas issued was 7,093.6
Overview of the Tax Credit and
Income Tax Exclusion
Adoption costs can exceed $40,000, depending on the type of adoption, with the
following ranges:7
! Domestic public agency adoptions: $0 to $2,500.
! Domestic private adoptions: $5,000 to $40,000 (or more).
! Intercountry adoptions: $7,000 to $30,000 (or more).
The federal adoption tax credit and income tax exclusion (for employer-
provided adoption expenses) are intended to help offset some of the costs of adoption
for taxpayers.8
Both the credit and the income tax exclusion are subject to the same phaseout
(or income limitation) and the same maximum qualified expenses that can be claimed
per adoption. Both tax provisions use the same definitions of qualified expenses,
eligible child and special needs child, and both have the same special rules for
intercountry adoptions.
The Adoption Tax Credit. The Adoption Tax Credit is available to
taxpayers who have either initiated or completed the adoption process.9 Unlike many
other tax credits, the adoption tax credit has a 100% credit rate — the amount of the
credit is the same as the amount of qualified expenses. The dollar limit for qualified
expenses is adjusted annually for inflation.10 In tax year 2006, the dollar limit for
qualified expenses is $10,960.
6 United States Department of State, Bureau of Consular Affairs, Orphan Visa Statistics,
Immigrant Visas Issued to Orphans Coming to the United States, see [http://travel.state.gov/
family/adoption/stats/stats_451.html].
7 Child Welfare Information Gateway, Costs of Adopting: A Factsheet for Families, 2004,
available at [http://www.childwelfare.gov/pubs/s_cost/index.cfm].
8 For help with the tax terms used in this report, please see CRS Report RL30110, Federal
Individual Income Tax Terms: An Explanation, by Pamela Jackson, or Internal Revenue
Service (IRS) Publication 17, Your Federal Income Tax.
9 A taxpayer can incur qualified adoption expenses throughout, and even after completing,
the process to adopt a child. One example of an expense incurred at the beginning of the
process is adoption fees. During the process, the taxpayer may incur travel expenses as part
of the adoption process, and after completion of the adoption process, the taxpayer may
incur qualified expenses for the final legal fees.
10 In statute, the limitation is $10,000 adjusted for inflation each year beginning with tax
year 2003.

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The most recent public data available on the use of the adoption tax credit by
the type of adoption are for tax year 1998. In tax year 1998, taxpayers claimed the
adoption tax credit for the adoption of 4,700 children with special needs, or about
15% of all such adoptions. (Most likely, these were foster children adopted through
public child welfare agencies.) In contrast, in that same year, taxpayers adopting
internationally claimed some part of the tax credit for 14,300 adoptions, representing
about 91% of the approximately 15,800 intercountry adoptions completed that year.11
However, since that time Congress has made significant changes to tax law,
including (1) changes to the adoption tax credit that raise the maximum amount of
the credit and permit taxpayers who adopt a special needs child to claim the full tax
credit, regardless of the amount (if any) of qualified adoption expenses paid by the
taxpayer, and (2) changes to other tax provisions, such as the child credit, that may
affect the usage of the adoption tax credit. As a result, the usage of the adoption tax
credit by type of adoption may have changed significantly since 1998, and use of the
adoption tax credit for special needs children may have increased significantly.
Qualifying Expenses. A taxpayer can claim only expenses that are
necessary and reasonable and directly related to the adoption of an eligible child.12
The term “eligible child” refers to children under age 18 and to individuals who are
physically or mentally incapable of taking care of themselves.13 Qualified expenses
do not include those that violate federal or state law, are incurred in carrying out any
surrogate parenting agreement, or are for the adoption of a child who is the child of
the taxpayer’s spouse (i.e., a stepchild).14
For domestic adoptions, taxpayers may claim the adoption tax credit in the tax
year that they incur the qualifying expense, without regard to the status of the
adoption. This means that even if an adoption is never finalized, the taxpayer may
claim the adoption tax credit for the qualified expenses associated with the adoption.
For intercountry adoptions, the adoption must be finalized before the taxpayer can
claim the adoption tax credit for any qualifying expenses. Specific types of expenses
eligible for the credit are not listed in the Internal Revenue Code (IRC). Table 1
shows examples of qualified expenses provided by Internal Revenue Service (IRS)
publications.
11 Department of the Treasury, Report to the Congress on Tax Benefits for Adoption,
October 2000, pp. 2-3. The data in the report on the adoption tax credit reflect the credit
taken that tax year. Taxpayers may not be able to use the full amount of the adoption tax
credit in the tax year in which they incur qualified adoption expenses. They can carryover
any unused adoption tax credit to future tax years (for up to five tax years). United States
Department of State, Bureau of Consular Affairs, Orphan Visa Statistics, Immigrant Visas
Issued to Orphans Coming to the United States (data for 1998).
12 Internal Revenue Code (IRC) § 23(d)(1)(A).
13 IRC § 23(d)(2).
14 IRC § 23(d)(1)(B) and IRC § 23(d)(1)(C).

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CRS-5
Table 1. Examples of Qualifying and Non-qualifying Expenses
Qualifying Expenses
Non-qualifying Expenses
— court costs
— expenses already covered by assistance
— attorney fees
through state, federal, employer or other
— adoption fees
programs
— travel expenses
— expenses that violate state or federal law
— re-adoption expenses in the case of
— expenses incurred for an adoption
intercountry (foreign) adoptions
carried by a surrogate
— other costs directly related to the
— expenses incurred for adopting a
adoption
spouse’s child
— expenses paid before 1997
Source: Internal Revenue Service (IRS) Publication 968 (for tax year 2004 returns).
Note: These lists are not exhaustive but are intended to illustrate what are considered qualifying
expenses and non-qualifying expenses.
Special Rules for Special Needs Children. Beginning with tax year
2003,15 a taxpayer claiming the credit for the adoption of a special needs child is
assumed to have incurred the maximum amount of qualifying expenses and may
claim the full credit.16 Many children adopted from the public child welfare system
meet the definition of special needs for the adoption tax credit. A child is defined as
a special needs child if the child’s state of residence determines that
! the child cannot, or should not, be returned to the home of his or her
birth parents;
! there is a specific factor or condition which leads to the reasonable
conclusion that the child will not be adopted without assistance
provided to the adoptive parents;
! and the child is a citizen or legal resident of the United States.
Examples of specific factors (or conditions) that may be considered in
determining whether a child is a special needs child include ethnicity; minority
status; age; status as part of a sibling group; mental, emotional or physical handicap;
and other medical conditions.17 The definition of “special needs” for the adoption tax
credit matches the definition provided in Section 473 (Title IV-E) of the Social
Security Act for the federal Adoption Assistance Program.18
15 Prior to tax year 2003, a taxpayer claiming the adoption tax credit (or using the income
tax exclusion) for the adoption of a special needs child had to document the qualifying
expenses.
16 IRC § 23(d)(3)
17 Ibid.
18 For more information on federal adoption assistance programs, see CRS Report RL31242,
Child Welfare: Federal Program Requirements for States, by Emilie Stoltzfus.

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Special Rules for Intercountry Adoptions. For purposes of the tax code,
a child must be a legal resident or citizen to qualify as a special needs child;
therefore, no intercountry adoption meets the tax code’s definition of special needs.19
Although a taxpayer may not claim a total adoption tax credit of more than $10,960
in tax year 2006 for any single adoption, the taxpayer may claim the adoption tax
credit for a single adoption in more than one tax year, depending on when the
adoption expenses are paid and whether the adoption is domestic or intercountry. For
a domestic adoption, the qualifying expenses may be claimed for the adoption tax
credit prior to and during the adoption process, even if the adoption is not finalized;
for an intercountry adoption, the adoption must be finalized before a taxpayer can
claim the credit for the adoption expenses.20 Therefore, a taxpayer adopting a foreign
child may only claim the credit beginning in the tax year in which the adoption is
finalized. Table 2 shows the relationship between the tax year in which expenses are
paid and the tax year when those expenses are eligible for the adoption tax credit,
based on the type of adoption.
Table 2. When Qualified Expenses Are Eligible:
Domestic and Intercountry Adoptions
When the Qualified
When Taxpayer May Claim Expenses
Expenses Are Incurred
Domestic Adoptions
Intercountry Adoptions
Tax years before the tax
Tax year in which
Tax year in which the
year in which the adoption
expenses are incurred (or
adoption is finalized (or
is finalized
later tax years)
later tax years)
Tax year in which the
Tax year in which the
Tax year in which the
adoption is finalized
adoption is finalized (or
adoption is finalized (or
later tax years)
later tax years)
Tax years after the tax year
Tax year in which
Tax year in which the
in which the adoption is
expenses are incurred (or
expenses are incurred (or
finalized
later tax years)
later tax years)
Source: Information taken from IRS Publication 968 (for tax year 2004 returns).
Limitations. In addition to the maximum amount for qualified expenses, two
other significant limitations are related to the credit. The first is the phaseout of the
credit, or maximum income limitation. The full credit can only be claimed by
families with an adjusted gross income (AGI)21 equal to or less than $164,410 in tax
19 IRC § 23(d)(2)(C)
20 IRC § 23(e).
21 Adjusted gross income is total taxable income after statutory adjustments. Total taxable
income does not include income that is exempt from income taxes (such as veterans
benefits). Statutory adjustments reduce taxable income before exemptions and any standard
or itemized deductions. Examples of statutory adjustments are Health Savings Accounts,
(continued...)

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year 2006.22 For taxpayers with incomes above this threshold amount, their credit is
reduced by the ratio of their income above the threshold to $40,000. For example,
a taxpayer with an AGI of $180,000 would have their credit reduced by 39%
(calculated as $180,000 - $164,410, or $15,590 divided by $40,000, equals 39%).
For taxpayers with an AGI $40,000 or more above the threshold,23 the credit is
reduced to zero ($0).
The second limitation is that the credit is nonrefundable, and a nonrefundable
tax credit can only offset tax liability.24 For the adoption tax credit, the actual amount
of the credit that may be taken is based on tax liability remaining after (almost all)
other nonrefundable tax credits have been applied — the foreign tax credit, credit for
child and dependant care expenses, credit for the elderly and disabled, education
credits, retirement savings contribution credit, and the child tax credit.25 Therefore,
taxpayers with a tax liability that is significantly lower than their qualified adoption
expenses (after the other nonrefundable tax credits) receive only a limited benefit
from the tax credit. If the qualified expenses exceed the taxpayer’s tax liability, the
tax liability will be reduced to zero, but the taxpayer will not receive a refund. The
lower the taxpayer’s tax liability, the lower the benefit from the credit. There is,
however, a carryover provision that allows a taxpayer to carry the credit forward for
up to five years.26
Claiming the Credit. To claim the adoption tax credit, a taxpayer must fill
out IRS Form 8839.27 Depending on the taxpayer’s marital status, the filing
requirements may vary. Generally, a married couple must file a joint tax return to
claim the adoption tax credit.28 If two taxpayers (not married to each other) wish to
claim the adoption tax credit, they may split the qualified expenses for the adoption
21 (...continued)
IRA deductions, and alimony paid. The limitation is based on adjusted gross income
without regard to IRC Sections 911, 931, or 933.
22 IRC § 23(b)(2)(A). The income limitation is $150,000 adjusted for inflation; therefore,
the income limit in tax year 2006 is $164,410.
23 Taxpayers with an income of $204,410 or more in tax year 2006.
24 A non-refundable tax credit is a tax credit that cannot exceed a taxpayer’s tax liability.
Any credit amount “left over” (more than the taxpayer’s tax liability) may be (depending on
the tax credit) carried over and used in a future tax year. With a refundable tax credit, such
as the Earned Income Tax Credit, the taxpayer receives a tax refund for the amount of the
tax credit in excess of tax liability.
25 IRC § 23(b)(4).
26 IRC Title 26, Section 23 (c).
27 IRS Instructions for Form 8839 (for tax year 2005).
28 Ibid. If a married person has been living apart from his or her spouse for more than six
months of the tax year, the child to be adopted has lived with the person for more than six
months of the tax year, and the person has paid more than one-half of the adoption costs and
the cost of the home in which the person and the child reside, the married person may claim
the adoption tax credit when filing a married filing separate tax return.

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tax credit (and therefore the adoption tax credit) by mutual agreement.29 However,
the total of qualified expenses (and adoption tax credit) cannot exceed the maximum
allowed under law ($10,960 in tax year 2006). Taxpayers must include the tax
identification number (Social Security number) of the child they are adopting.30
Finally, taxpayers must keep all receipts and records of expenses for reporting
purposes.31
Income Tax Exclusion for Employer Adoption Assistance.32
Generally, the income tax exclusion for employer adoption assistance follows many
of the same rules, applications, and limitations as the adoption tax credit. The
maximum amount of qualified expenses that can be claimed is subject to the same
dollar limitation as the tax credit.33 A taxpayer’s eligibility for the income tax
exclusion is also subject to the same income limitation (or phaseout) as the adoption
credit.34 The income tax exclusion for employer-provided adoption assistance
follows the same definitions of special needs children, qualified expenses, and
eligible children. The special rules for intercountry adoptions and filing requirements
of the adoption tax credit also apply to the income tax exclusion.35 Individuals can
use both the adoption tax credit and the income tax exclusion (if both are available
to them), but cannot claim the same expenses for both tax provisions.36 Employer-
provided adoption assistance must be provided through a separate written plan for an
adoption assistance program, which is generally available to all employees.
However, employers are restricted from offering the adoption assistance program to
certain high-earning employees.37
Unlike the adoption tax credit, employer adoption assistance programs act as
income tax exclusions. This means that an employee who has qualifying expenses
covered through an employer adoption assistance program (expenses paid for by the
29 Ibid.
30 Ibid.
31 Ibid.
32 An income tax exclusion is a form of income that is not subject to taxation. An income
tax exclusion is normally not reported for tax purposes (i.e., federal income taxes and/or
employment taxes). Examples of an income tax exclusion are 401(k) contributions and
fringe benefits, which are not included as income for federal income taxes and/or
employment taxes (Social Security and Medicare taxes) on a person’s wage statement or
W-2 form. They may, however, be reported separately on the form for information
purposes.
33 IRC § 137(b)(1)
34 IRC § 137(b)(2)
35 IRC § 137(e)
36 IRC § 23(3)(A)
37 IRC § 137(c), and IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits.
During the year, no more than 5% of all payments made by the adoption program can be for
shareholders or owners (or their spouses or dependents). A shareholder or owner is defined
as someone who owns 5% or more of the stock, capital, or profit of the business (on any day
of the year).

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CRS-9
employer or through a reimbursement program funded by the employer, employee,
or both parties) does not have to include the value of the covered adoption expenses
as income for federal income taxes.38 Employer adoption assistance programs are a
separate employee benefit and are provided by direct payment of eligible expenses
by the employer or the reimbursement of eligible expenses through an account
(usually administered by a third party) funded by the employee, employer, or both.39
Employers may include an adoption assistance program based on reimbursement as
part of a cafeteria plan for employee benefits, and reduce an employee’s salary to pay
for the benefit. Companies may offer informational and referral benefits, direct
payment or reimbursement of eligible expenses, paid leave benefits, or a combination
of benefits for adoption.40
According to the Department of Health and Human Services, a Hewitt
Associates study found that 39% of major U.S. companies offered adoption
assistance as an employee benefit.41 Employers sampled by Hewitt offered from
$1,500 to $15,000, with an average of $3,879 in reimbursement of adoption
expenses.42 Because an employer has discretion in the amount and type of assistance
offered for adoption, the income tax exclusion for employer-provided adoption
assistance may be more limited than the adoption tax credit in the types of eligible
adoption assistance.
Although employer-provided adoption assistance is excluded from federal
income taxes, unlike other flexible benefits such as child care, it is still subject to
Social Security and Medicare taxes.
Policy Issues
Several policy issues are associated with the federal adoption tax provisions,
including the limitations on the credit (the phaseout and nonrefundability), the rules
for special needs children and intercountry adoptions, the sunset of the EGTRRA
changes, and whether the tax provisions are the best way to provide adoption
assistance.
Phaseout (Income Limitation). To claim the full value of the adoption tax
credit, a taxpayer must have a tax liability after other nonrefundable tax credits that
is equal to or greater than the maximum amount of qualified expenses for the tax
38 IRC §137(a)(1)
39 Los Angeles Times, Business: "Personal Finance; Aid is Available to Help Ease Adoption
Burden," p. C2, July 31, 2005 (hereinafter referred to as Personal Finance; Aid is
Available).
40 Department of Health and Human Services, Administration for Children and Families,
Children’s Bureau, NAIC, Employer-Provided Adoption Benefits (2004), available at
[http://www.childwelfare.gov/pubs/f_benefi.cfm].
41 Ibid.
42 Ibid.

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credit. For example, for a childless married couple adopting a child in tax year 2006,
the full tax credit and exclusion would be claimed in tax year 2006, only if the
taxpayer (the married couple) has an adjusted gross income (AGI) between
approximately $90,000 and $165,000.43 If the taxpayer has an income outside this
range, the taxpayer will have a reduced credit or no credit in the tax year 2006, but
in some cases may be able to claim the balance of the credit in future tax years (in up
to 5 future tax years).
Nonrefundability. The adoption tax credit is available to families at all
incomes below the level at which the adoption tax credit is completely phased out
($204,410 in tax year 2006). In practice, because the adoption tax credit only works
to offset tax liability after other nonrefundable tax credits (in other words, it is not
refundable), taxpayers whose tax liability (after other nonrefundable tax credit) is
lower than their qualified adoption expenses will receive a reduced adoption tax
credit or no adoption tax credit. The interaction of the adoption tax credit with the
other nonrefundable credits is significant because when a taxpayer (with qualified
adoption expenses) adopts a child, the taxpayer becomes eligible for a $1,000 child
tax credit (for the adopted child). The child tax credit reduces tax liability before the
adoption tax credit.
Impact of the Phaseout (Income Limit) and Nonrefundablity. As
shown in Table 3, taxpayers claiming the adoption tax credit accounted for only
.05% of all tax returns, reflecting a relatively small number of all taxpayers claiming
the adoption tax credit. Few taxpayers claiming the adoption tax credit had an AGI
of less than $25,000 or more than $200,000. As shown in Table 3, the average credit
for every AGI class was below the maximum adoption tax credit. However, the
average credit increases with the AGI class, reflecting the increase in tax liability to
offset with the credit. The exception is the $200,000 or more AGI class in which few
taxpayers claim the adoption tax credit, reflecting the phaseout of the adoption tax
credit.
43 Calculations by the Congressional Research Service (CRS) using SysTTIM (System for
Tax, Transfer and Income Modeling), a case simulation model.

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CRS-11
Table 3. Utilization of the Adoption Tax Credit, Tax Year 2004
Average
Tax Returns
Adjusted
Total
Share of
Amount of
Credit
with the
Gross Income
Tax
Total Tax
Adoption Tax
Amount
Adoption
Class
Returns
Returns
Credit
per
Tax Credit
Return
Under $25,000
58,303,423
974
0.00%
$420,000
$431
$25,000 under $50,000
32,998,973
10,686
0.03%
$15,754,000
$1,474
$50,000 under $75,000
18,047,126
19,969
0.11%
$66,954,000
$3,353
$75,000 under $100,000
10,119,515
23,706
0.23%
$114,157,000
$4,816
$100,000 under $200,000
9,735,569
15,477
0.16%
$102,702,000
$6,636
$200,000 and over
3,021,436
324
0.01%
$1,902,000
$5,870
Total
132,226,042
71,136
0.05%
$301,889,000
$4,244
Source: Table prepared by the Congressional Research Service (CRS) from Internal Revenue
Service, Individual Complete Report, Publication 1304, Table 3.3.
The percentage of total tax returns using the adoption tax credit has increased
since tax year 1997, the first year of the credit, when .03% of total tax returns
claimed the adoption tax credit. The change to the phase-out income level made by
the Economic Growth and Tax Relief Reconciliation Act (EGTRRA, P.L. 107-16)44
significantly increased the percentage of tax returns with an adjusted gross income
between $100,000 and $200,000 claiming the adoption tax credit (from .03% in tax
year 2000 to .16% in tax year 2004). In addition, between tax years 2000 and 2004,
the average annual growth rate in the number of returns claiming the adoption tax
credit was 16.3%, further reflecting the impact of the EGTRRA expansions for the
credit.45 In contrast, the total number of tax returns grew at an annual rate of 0.5%
between tax years 2000 and 2004, while the estimated number of total adoptions
remained relatively constant.
Making the adoption tax credit refundable may allow more taxpayers at lower
levels of AGI to benefit from the adoption tax credit. However, doing so would
increase the cost of the credit. The current cost of the adoption tax credit is relatively
small ($301.9 million in credit claimed in tax year 2004); in contrast, in tax year
2004, $3.3 billion was claimed for the child and dependent care credit and $32.3
billion for the child tax credit cost. One consideration in making the adoption tax
credit refundable is an issue that arises with all refundable tax credits — the
refundable tax credit may encounter overclaim problems similar to those experienced
with the Earned Income Tax Credit (EITC).46
44 EGTRRA (P.L. 107-16) raised the income threshold for the phaseout of the adoption tax
credit from $75,000 to $150,000.
45 Congressional Research Service (CRS) calculations using Internal Revenue Service data
from Individual Complete Report, Publication 1304, Table 3.3, for tax years 1997 through
2003.
46 For information on the policy issues for the EITC, see CRS Report RS21477, The Earned
Income Tax Credit: Legislative Issues, by Christine Scott.

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CRS-12
Figure 1 estimates the value of the adoption tax credit for a childless married
couple adopting a child in tax year 2006, by average cost of the adoption and the
income of the couple. The figure shows that a couple claiming adoption expenses
of $20,000 must have an AGI of approximately $90,000 before they have a tax
liability (after other nonrefundable tax credits) that is equal to or greater than the
maximum adoption tax credit (of $10,960) in 2006.47 Figure 1 shows that the
amount of the adoption tax credit is limited by tax liability (after other nonrefundable
tax credits), not by the cost of the adoption. As AGI increases, larger amounts of the
adoption tax credit can be used to offset tax liability (and reduce the final adoption
cost). Therefore, assuming a taxpayer adopting a child out of foster care has
qualified adoption expenses, that taxpayer has a greater chance of having those costs
covered by the adoption tax credit. This is because foster care adoptions are the least
expensive, with costs ranging from $0 to $2,500. However, even to reach $2,500 of
tax liability, a taxpayer must have an AGI of approximately $50,000.48 Because of
the carryover provision, any adoption tax credit not claimed in the current tax year
may be claimed in future tax years (up to five tax years). Figure 1 only represents
the utilization of the credit in the first tax year the taxpayer (the married couple) is
eligible for the credit.
Because costs tend to be much higher for domestic private adoptions and
intercountry adoptions, a taxpayer will have to have a higher AGI (and higher tax
liability) to utilize the maximum value of the adoption tax credit (and recover more
of the adoption costs). Where the adoption costs are greater than the maximum value
of the credit (which may be the case for some domestic private adoptions and
intercountry adoptions), the taxpayer will not recover the full cost of the adoption
through the adoption tax credit, even if the taxpayer can claim the maximum
adoption tax credit. For example, if an adoption costs a taxpayer $30,000, the
taxpayer will receive the maximum adoption tax credit if his or her AGI is between
approximately $95,000 and $160,000. However, the final adoption costs will still be
greater than the maximum adoption tax credit.
As a result of the phaseout (income limitation) and nonrefundability of the tax
credit, many taxpayers may not be able to take the full adoption tax credit for an
adoption. This raises the policy issue of whether, and how, to expand the tax
provisions to increase the use of the tax provisions, and whether federal and state
subsidies may be more efficient than tax provisions in helping offset the costs of
adoption.
47 Calculations by the Congressional Research Service (CRS) using System for Tax,
Transfer and Income Model (SysTTim), a case simulation model.
48 Ibid. Many children adopted out of the foster care system meet the definition of “special
needs” included in the tax code, and as described in the text above, a taxpayer does not need
to have any qualifying adoption expenses to claim the full amount of the adoption tax credit.

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CRS-13
Figure 1. Simulated Utilization of the Adoption Tax Credit by Type of
Adoption and Level of Adjusted Gross Income, Married Couple
Adopting One Child, Tax Year 2006
$12,000
Private Domestic or
$10,000
Intercountry -
$30,000
(above the
maximum
$8,000
it
tax credit amount)
red
C
x
a
T
$6,000
Intercountry - $7,000
tion
op
d
Private Domestic -
A
$4,000
$5,000
$2,000
Foster Care - $2,500
$0
$0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
00
00
000
00
00
000
000
000
00
00
00
00
00
00
00
00
00
00
00
0,
0,
0,
0,
0,
0,
0,000 0,
0,
$10,
$2
$3
$40,
$5
$6
$7
$8
$9
$10
$110, $120, $130, $140, $150, $160, $170, $180, $190, $20
Adjusted Gross Income
Source: Figure prepared by the Congressional Research Service (CRS) using SySTTIM (System for
Tax, Transfer and Income Mobility), a case simulation model. For the figure, the taxpayer is a
childless married couple adopting one child, claiming the standard deduction and eligible for the child
credit (including the refundable additional child credit), the adoption tax credit, and the earned income
credit.
Federal/State Subsidies Versus Tax Incentives. Congress considered
the efficiency of adoption tax provisions and adoption subsidy programs in the 1980s.
In 1980, the federal government began sharing (with the states) the cost of providing
monthly subsidies for parents who adopt children with special needs (Adoption
Assistance and Child Welfare Act of 1980, P.L. 96-272). This federal adoption
assistance program, which helps parents with the ongoing costs of raising an adoptive
special needs child, is authorized under Title IV-E of the Social Security Act. In
1981, the Economic Recovery Tax Act (P.L. 97-34) established an itemized tax
deduction for certain costs of adopting a child with special needs. The provision was
intended to encourage adoption of special needs children by relieving some of the
financial burden for taxpayers.49
In 1986, the Tax Reform Act (P.L. 99-514) repealed the itemized deduction and
instead expanded the Title IV-E program to require that states provide direct
assistance to adoptive parents to help with the initial and nonrecurring costs of
adopting a special needs child. That legislation also authorized federal matching
grants to states for this purpose, which, as implemented, range up to $2,000 for an
49 Joint Committee on Taxation, General Explanation of the Economic Recovery Tax Act of
1981, JCS-10-87, Dec. 29, 1981, pp. 57-58.

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CRS-14
adoptive family, with the federal government reimbursing 50% ($1,000) of the cost
to the state. In making this change, Congress believed that the itemized tax
deduction provided the greatest benefit to high-income earners.50 Congress also
believed that agencies with expertise in placing children with special needs should
have budgetary control over adoption assistance, and that grant programs would
facilitate more appropriate federal spending than the tax system.51
Since 1997, however, when P.L. 104-188 first provided for an adoption tax
credit, federal assistance for adoption has been provided through both grant programs
and the tax code.
Special Needs Children Versus Non-special Needs Children.
Although the maximum amount of qualified expenses is the same for all adoptions,
a taxpayer who adopts a special needs child is assumed to have incurred the
maximum amount of qualified expenses (regardless of actual expenses) and,
therefore, has the maximum adoption tax credit.
Special needs children, by definition, are considered hard to place for adoption
without assistance to their adoptive parents. Providing a preference for one type of
adoptive child over another in the federal tax code may be viewed as unfair or
inequitable — a taxpayer adopting a special needs child receives a larger tax benefit
than a taxpayer adopting a non-special needs child, even if both taxpayers have the
same total costs of adoption. However, the preference for special needs children is
a policy decision made by Congress to encourage adoption of children who might
otherwise enter adulthood without a permanent family.52
Domestic Adoptions Versus Intercountry Adoptions. Federal tax
assistance for adoption provides incentives for both domestic (public and private) and
intercountry adoptions. However, domestic adoptions are favored under the tax
provisions for adoption because for a domestic adoption, qualifying expenses may
be claimed even if a domestic adoption does not finalize.53 Intercountry adoptions
must become finalized before a taxpayer can claim any qualifying expenses for the
tax credit or income tax exclusion.54 Intercountry adoptions are typically considered
50 The use of federal matching grants provided assistance to a greater range of families.
51 Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1986, May
4, 1987, pp. 52-53.
52 The preference for special needs children has existed since the itemized deduction for
adoption expenses, which was only for the adoption of a special needs child, was established
by the Economic Recovery Tax Act of 1981 (P.L. 97-34). The adoption tax credit
established by P.L. 104-188 also contained a preference for special needs children in the
form of a higher limit on qualified expenses for the adoption of a special needs child.
EGTRRA (P.L. 107-16) established that beginning in tax year 2003, a taxpayer adopting a
special needs child was assumed to have the maximum amount of qualified adoption
expenses for the adoption tax provisions.
53 IRC § 23
54 Ibid.

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CRS-15
more expensive and less predictable for finalization than domestic adoptions.55 A
family may spend a great deal of money for an intercountry adoption, but will not
receive a tax benefit if something prevents the adoption from becoming final. The
preference in the federal tax provisions for domestic adoption may be considered
inequitable or unfair by some families that do not receive a tax benefit because their
intercountry adoption was not finalized.
EGTRRA. A current policy issue surrounding the tax credit and income tax
exclusion is the sunset of certain provisions established in the Economic Growth and
Tax Relief Reconciliation Act of 2001 (EGTRRA, P.L. 107-16). EGTRRA provided
for an increase in the maximum qualified expenses and increased the amount of
income where the credit phaseout begins (the income limitation). However, to
remain in compliance with the Congressional Budget Act, EGTRRA included a
sunset provision — the changes will expire and, in 2011, prior law will take effect.
Taxpayers, beginning in tax year 2011, will be allowed to claim up to $5,000 in
qualified expenses for non-special needs children and up to $6,000 for special needs
children (all expenses must be documented, regardless of special needs status).
Taxpayers with incomes greater than $75,000 will receive a reduced adoption tax
credit (because of the phaseout), and taxpayers with incomes greater than $115,000
($40,000 above the threshold) will not be eligible for the adoption tax credit.
Legislative History
As noted earlier, federal tax assistance for adoption began with the Economic
Recovery Tax Act of 1981 (P.L. 97-34), which provided an itemized deduction for
adoption expenses, which was repealed by the Tax Reform Act of 1986 (P.L. 99-
514). However, the 1986 law also amended Title IV-E of the Social Security Act to
require states to make direct payments to parents adopting children with special
needs to help offset the nonrecurring costs of adoption (attorney fees, court costs,
etc.) and authorized 50% federal matching funds to states for these purposes.56
Several bills subsequently introduced proposed tax incentives for adoption. Tax
provisions for adoption (a tax credit and income tax exclusion for employer provided
adoption programs) were included in the Balanced Budget Act of 1995 (H.R. 2491,
104th Congress),57 which was vetoed by President Clinton (for reasons unrelated to
the adoption tax provisions). The Adoption Promotion and Stability Act of 1996
(H.R. 3286, 104th Congress) also proposed an adoption tax credit and income tax
exclusion. The Finance Committee report on the bill noted that one justification for
55 DHS, ACF; Children’s Bureau, NAIC
56 Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1986, JCS-
10-87, May 4, 1987, pp. 52-53.
57 This legislation is also referred to as the Seven-Year Balanced Budget Reconciliation Act
of 1995, the original title of the legislation as passed by the House of Representatives and
before the Senate amendment. The text above uses the title from the conference report
(H.Rept. 104-350) agreed to by the House on Nov. 17, 1995.

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CRS-16
the adoption tax provisions was that the financial costs of adoption should not be a
barrier to adoption.58
The Small Business and Job Protection Act of 1996 (P.L. 104-188).
P.L. 104-188 provided a federal tax credit and income tax exclusion to taxpayers for
qualified adoption expenses. Qualifying expenses were limited to $5,000 for an
adoption and to $6,000 for the adoption of a special needs child. P.L. 104-188
provided a phase-out provision that reduced the tax benefits for taxpayers with
incomes of more than $75,000 and less than $115,000. P.L. 104-188 also included
a carryover provision so that a taxpayer with more adoption tax credit than tax
liability could carryover the excess tax credit for up to five years. Finally, the act
provided several definitions and special rules (that remain in current law), including
qualifying expenses, eligible child, child with special needs, and special rules for
intercountry adoptions.
The Taxpayer Relief Act of 1997 (P.L. 105-34). P.L. 105-34 clarified that
the adoption tax credit is claimed the tax year after qualified expenses are incurred
only when the adoption has not been finalized. Previously, the provision simply
stated that the adoption tax credit was claimed the tax year after expenses were
incurred, except for expenses incurred the tax year the adoption was finalized (which
could be claimed the tax year incurred). P.L. 105-34 also conformed the definition
of adjusted gross income for the phaseout of the income tax exclusion to be the same
definition of adjusted gross income used for the phaseout the adoption tax credit.
IRS Restructuring and Reform Act of 1998 (P.L. 105-206). P.L. 105-
206 changed the carryover provision of the credit so that the phaseout of the credit
applies only in the year in which the credit is generated and does not reduce carryover
credit amounts.
The Economic Growth and Tax Relief Reconciliation Act of 2001
(EGGTRA, P.L. 107-16). EGGTRA (P.L. 107-16) increased the limit on qualified
adoption expenses to $10,000 for all children (from $5,000 for non-special needs
children and $6,000 for special needs children). In addition, EGTRRA increased the
income level for the beginning of the credit phaseout to $150,000 (from the previous
level of $75,000) and provided an inflation adjustment for the limit on qualified
adoption expenses and the phaseout income level based on the consumer price index
(CPI). EGTRRA also included a sunset provision for the legislation. The changes
to the adoption tax provisions are scheduled to expire in 2011.
Congress believed that the EGTRRA were necessary to continue to encourage
adoptions. This belief was based on reported increases in adoption expenses and the
success of the tax credit and income tax exclusion in reducing the final costs of
adoption for taxpayers.59
58 U.S. Congress, Committee on Finance, S.Rept. 104-279, Adoption Promotion and
Stability Act of 1995, pp. 2-5.
59 Joint Committee on Taxation, General Explanation of Tax Legislation in the 107th
Congress, JCS-1-03, Jan. 24, 2003.

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CRS-17
The Job Creation and Workers Assistance Act of 2002. The Job
Creation and Workers Assistance Act (P.L. 107-147) clarified that qualifying
expenses for the adoption of children with special needs do not need to be
documented. Therefore, a family seeking to adopt a child with special needs could
claim the maximum credit without having to document expenses (P.L. 107-147).
The conference report accompanying H.R. 1836 (EGTRRA, P.L. 107-16) provided
that the maximum amount of qualifying expenses was assumed to have been claimed
(without the documentation requirement) in the case of a special needs adoption for
tax years beginning after 2002. However, the legislative language of EGTRRA did
not make this provision clear. Therefore, a technical correction was made in P.L.
107-147.60 P.L. 107-147 also provides that any qualifying expenses incurred prior
to tax year 2002 are subject to the pre-EGTRRA provisions. In other words,
expenses incurred prior to 2002 were limited to qualifying expenses of $5,000 for
non-special needs children and $6,000 for special needs children. Taxpayers
claiming expenses prior to 2002 were also subject to the phaseout income level that
existed prior to EGTRRA.
Legislation in the 109th Congress
Legislation was introduced in the 109th Congress related to the federal adoption
tax provisions. H.R. 268 and H.R. 305 would have repealed the EGTRRA sunset
provision as it relates to the adoption tax provisions. H.R. 1561, the Childhood
Adoption Act, would have increased the limit on qualified adoption expenses to
$15,000 per child. The bill would also have provided an alternative inflation
adjustment for the limit on qualified adoption expenses and the phaseout income
level (or income limitation). The bill also proposed to make the credit refundable so
more taxpayers could benefit from the credit.
Legislation in the 110th Congress
In the 110th Congress, legislation has been introduced (H.R. 273 and H.R. 471)
that would repeal the EGTRRA sunset provision as it relates to the adoption tax
provisions.
60 U.S. Congress, Committee on Ways and Means, Economic Growth and Tax Relief
Reconciliation Act of 2001, Conference Report to Accompany H.R. 1836, H.Rept. 107-084,
May 26, 2001, pp. 140-141.

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