Adoption Tax Credit

What is the Current Status of the Federal Adoption Tax Credit?

The legislation to avoid the fiscal cliff (American Taxpayer Relief Act of 2012, signed into law January 2, 2013) included a provision that made the adoption tax credit permanent. “Permanent” means that it does not have an expiration date, but it does not mean that the credit is safe from elimination. Proponents of eliminating the adoption tax credit cite the money that will be saved if the credit is removed.

The Taxpayer Relief Act did not make the adoption tax credit refundable; it only benefits adoptive families who have federal income tax liability. The refund ability bills in the U.S. House and Senate (H.R. 2144/S. 950) would make the credit refundable and ensure that all families can benefit from the credit.

Tax benefits for adoption include both a tax credit for qualified adoption expenses paid to adopt an eligible child and an exclusion for employer-provided adoption assistance. The credit is nonrefundable, which means it is limited to your tax liability for the year. The maximum amount (dollar limit) for 2016 is $13,460 per child. For more information on the Adoption Tax Credit, please visit the following website: http://www.irs.gov/taxtopics/tc607.html

What is the Adoption Tax Credit?

The adoption tax credit, which can be claimed for eligible adoption-related expenses, has helped thousands of American families offset the high cost of adoption since the credit was established in 1997. It has made adoption a financially viable option for many parents who might not otherwise have been able to afford adoption, allowing them to provide children with loving, permanent families. With over 100,000 children in the U.S. foster care system currently eligible for adoption, and an ever increasing number of orphaned and abandoned children worldwide languishing in institutions, the continuation of the adoption tax credit is vital to providing love, safety, and permanency through adoption to as many children as possible.

History of the Adoption Tax Credit

  • Although several different bills have been introduced to establish the adoption tax credit or make it a permanent part of the U.S. tax code, Congress has never passed legislation specific to the credit itself. Instead, the adoption tax credit has been extended every year since its initial passage as part of the Small Business Job Protection Act of 1996.
  • The Small Business Job Protection Act established a nonrefundable maximum tax credit of $6,000 for parents that had adopted children with special needs, and a nonrefundable tax credit of $5,000 for all other adoptive parents, both of which went into effect in 1997. The $5,000 non-special needs adoption tax credit for eligible income-qualifying parents was set to expire on December 31, 2001.
  • In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act, which raised the adoption tax credit to $10,000 for all adoptions, indexed the maximum allowable credit for inflation, and made the credit for special needs adoptions permanent. The tax credit for non-special needs adoptions was set to expire on December 31, 2010.
  • In March 2010, the adoption tax credit was included in the Health Care and Education Reconciliation Act (an act amending the Patient Protection and Affordable Care Act), delaying its sunset until December 31, 2011. This increased the maximum credit (indexed for inflation) to $13,170 per eligible child and also made the credit refundable for tax years 2010 and 2011, which allowed families to receive the full benefit during a single tax year regardless of taxes due that year.
  • On January 1, 2013, Congress passed the American Taxpayer Relief Act of 2012 (H.R. 8). Amongst the provisions of this Act was an extension of the adoption tax credit in which President Obama signed into law Wednesday, January 2, 2013.