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Current Law

The adoption tax credit is designed to offset out-of-pocket expenses incurred during the adoption process. It is meant to make adoption an option for families whose finances may not otherwise permit it. The credit’s amount is a direct function of how much is paid in “reasonable and necessary” adoption expenses, up to the credit maximum. For 2011, the credit is worth up to $13,360, and is refundable (which means that filers with zero or negative tax liabilities can receive money from the credit). Families that adopt special-needs children are eligible for a “flat” credit, meaning they can receive the maximum credit even if they spend little on adoption. For 2011, the credit begins to phase out after $185,210 AGI, and is phased out completely after $225,210 AGI.

Scheduled Changes

In 2013, only families who adopt special-needs children will be eligible for the credit, which will be worth up to $6,000 (it will no longer be “flat). The credit will no longer be refundable, and its income phaseout range will be significantly reduced.

ATRF Analysis

The adoption tax credit is a large credit (the largest available to individual taxpayers) that fills a small niche in the tax code. It is claimed by relatively few filers: the IRS reports that in 2009 80,676 returns claimed the credit. Scheduled changes will shrink this constituency dramatically by excluding non-special needs adoptions (that is to say, most adoptions).

For families that adopt non-special needs children in 2013, this means upwards of $13,000 in disallowed deductions — a dollar-for-dollar increase in tax liability for the amount they lose in the credit. Families that adopt special needs children are not off the hook, either, as the lower credit amount ($6,000) will increase their tax burden by over $7,000.

One of the changes to the adoption tax credit is beneficial: the elimination of the credit’s refund mechanism (which, as the Child Tax Credit demonstrates, is a euphemism for spending through the tax code). The advantages of this change, however, are swamped by the overwhelming negative aspects of other changes — chiefly, the $5.5 billion tax hike that will fall on adopting families. And in any case, the refundable portion of the tax credit is not often invoked, for the simple reason that adoption is most common among families with means. Voice for Adoption, an advocacy group, reports on IRS data that show “two-thirds of the dollars that go to the credit” go to families that make over $75,000 per year.

There is considerable doubt about the effectiveness of the adoption tax credit in promoting domestic foster care adoptions. There should be little doubt, however, that allowing the current iteration of the credit to expire will constitute a sizable tax increase on those who make the bold decision to adopt a child.

10 Year Cost to Taxpayers

Department of the Treasury: $5.5 billion

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