LegiStorm

Summary:

The federal government supports adoption in two primary ways: federal grants to state governments and tax benefits for individual taxpayers that help offset the costs of adopting a child. This report focuses on federal adoption tax benefits, which consist of an adoption tax credit and an income tax exclusion for employer - provided adoption assistance. The a doption t ax c redit 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 spou se’s child), there are some special rules related to claiming the credit for intercountry adoptions and for adoption of children with special needs (gen erally children whom the State child welfare agency considers difficult to place for adoption) . In 2018 , taxpayers may be able to receive an adoption credit of up to $13, 810 (this amount is annually adjusted for inflation). The credit is reduced for taxpayers with income over $20 7,140 and is phased out completely for taxpayer s with more than $24 7,140 in inc ome (these amounts are subject to annual inflation adjustment). The adoption credit is not refundable. However, the credit may be carried forward and claimed on future tax returns for up to five years after initially claimed. In addition, 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. The amount that can be excluded from a taxpayer’s income is capped at a maximum amount per adoption wh ich is the same maximum amount of the credit: $13, 810 in 201 8 . Taxpayers 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 exclusion for employer - provided adoption assistance. The legislative history of the current adoption tax benefits indicates that Congress enacted the se incentives to encourage more adoptions . However, there is currently little evidence t ha t adoption tax benefits are an effective policy tool to increase adoptions. Instead, data suggest that adoption tax benefits are often a windfall to families that would have adopted in their absence. In addition, t he vast majority of adoption tax benefits go to upper - income Americans, even though data indicate that a significant number of lower - and middle - income Americans adopt. Finally, r ecent evidence suggests that adoption tax benefits have been difficult for the IRS to administer to keep both erroneous benefit claims and taxpayer burden low. In light of these concerns with current adoption tax benefits, Congress may consider modifying t he credit or the exclusion for 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 view s direct spending as more effective at encouraging adoptions . Alternatively, Congress could eliminate adoption tax benefits and direct any additional revenue to deficit reductio n. Congress could also choose to make the adoption tax credit refundable, so that taxpayers with little or no tax lia bility 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 . Finally, policymakers cou ld modify some of the eligibility rules or method s to make the credit easier to administer .