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VFA Policy Intern Blog: Adoption Tax Credit

Adoption Tax Credit

By Michael Tuskey

Published 7/7

When a child is adopted, it means that they are given a family to call their own. While the main concern when it comes to adoption is finding the right family for the right child, the cost of adoption can be too much for some families. Depending on which agency an individual or individuals go through, the cost of adoption varies. Domestic public agencies can charge a range from a few hundred dollars to $2,500; while private adoption agencies can fluctuate from $4,000 to $40,000. Such a cost can be a great burden on families that are considering adoption, especially lower income families. The federal government helps offset the costs of adoption by providing a tax credit known as the Adoption tax credit. Voice for Adoption advocates for the adoption tax credit as it serves to reduce the cost of adoption for families that choose to adopt and therefore VFA considers the Adoption Tax credit a Policy Advocacy Priority.  The adoption tax credit is designed to reduce the cost of adoption and can cover the required adoption fees, court and attorney costs, travel expenses, and other expenses that are related to the adoption. To be eligible, the adoptive family must have an income that does not exceed $201,920 per year. The individual will itemize the costs of adoption which meet the qualifications where the year after the adoption has been finalized, the tax credit can be claimed. The Adoption Tax credit is a non-refundable credit, meaning the credit cannot be exceeded the taxes owed. The credit can be carried forward for up to 5 years, meaning that a $10,000 credit can be broken down into $2,000 per year on tax liability.

The tax credit can provided through two means: the credit itself and the exclusion employer adopted assistance. The credit allows an adoptive parent to reduce their tax liability up to $13,460. For example, if you have a tax liability of $10,000 and have a tax credit of $5,000, your tax liability would be $5,000. The second way to receive the tax credit is through employers who offer their employees exclusion adoption assistance. If the employer provides this benefit, though not all do, an employee who adopts can take off a maximum $13,460 from their taxable income. For example, an employee earns $100,000 a year and receives an exclusion credit of $10,000. With the tax credit, they can only be taxed for $90,000 dollars.

The idea of offering incentives for adoption was addressed in the  Economic Recovery Tax Act of 1981, which provided itemized deductions for adoption expenses of special needs children. It was repealed after 5 years, as opponents argued it wasn't the IRS’s business to be part of adoption process. It would take another 10 years before Congress would pass another adoption tax credit in The Small Business and Jobs Protection Act of 1996. The first version of the tax credit concerned, specifically, children with special needs and was limited to $6,000 dollars. The Economic Growth and Tax Relief Reconciliation Act of 2001 extended the tax credit to all forms of adoption and raised the tax credit to $10,000. Finally, The Affordable Care Act of 2010 and The American Taxpayer Relief Act of 2012 set the maximum tax credit at $13,460 and design to adjust to inflation.

The Adoption Tax credit is not set in stone. As Congress prepares to consider tax reform legislation this year all major tax credits are on the table. As such, it could be possible that Congress decides to reduce the adoption tax credit or simply cut the entire tax credit. Voice for Adoption stands against such a move because it could make the financial burden of adoption too great for families to overcome.

While the VFA supports the Adoption Tax credit, there are ways to make credit more accessible. The Adoption Tax Credit Refundability Act of 2017, has received bipartisan and bicameral support with the bill in both the House and Senate. The legislation would make the Adoption Tax credit refundable, allowing adopting family to receive a tax refund for the remaining credit after paying their tax liabilities. This would be significant for lower income families, as it would allow them to directly receive income to cover day to day expenses. Voice for Adoption looks to assure that financial costs never stop a family from adopting a child and giving them a place to call home.

 

References     

https://fas.org/sgp/crs/misc/R44745.pdf

https://adoptiontaxcredit.org/legislation/

https://www.irs.gov/taxtopics/tc607.html

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