The Adoption Tax Credit - Child Trends

the foster care system (private adoption) as well as those adopting children from other ... Phone 202-572-6000 Fax 202-362-8420 © 2007 Child Trends ... 45 percent and 48 percent of children adopted pri- vately and from ...
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Publication #2007-24

4301 Connecticut Avenue, NW, Suite 350, Washington, DC 20008 Phone 202-572-6000 Fax 202-362-8420

The Adoption Tax Credit: Is it an Effective Approach to Promote Foster Care Adoption? By Rob Geen

August 2007

Approximately 115,000 children in foster care are waiting to be adopted because a court or child welfare agency has determined that they cannot return home to their parents. Each year, about 50,000 children are adopted from foster care. At the same time, more than 24,000 children “age-out” of the foster care system each year when they turn 18, because the state has not secured adoptive parents for them. These young adults leave foster care without a permanent connection to a loving family.1 In 1996, Congress first enacted legislation to promote the adoption of foster children2 in the U.S. through the provision of a non-refundable3 tax credit. While intended to promote foster care adoption, the tax credit was also made available to persons adopting children in the U.S. outside of the foster care system (private adoption) as well as those adopting children from other countries (foreign adoption). How effective have tax credits been in promoting adoption and, in particular, adoption of foster children? Who received the adoption tax credit? This brief addresses these questions, based on our review of data provided by the U.S. Treasury from an analysis of income tax returns filed between 1999 and 2005.4 In sum, we find that: ■ Tax credits may not be the most effective approach

to promote foster care adoption, or adoption more generally. ■ The vast majority of adoption tax credit recipients

completed private or foreign adoptions rather than adoptions from foster care. ■ The

tax credit disproportionately supports higher-income families; those with incomes5 above $75,000 received two-thirds of the dollars.

■ The tax credit primarily supports the adoption of

younger children; more than 70 percent of the dollars were spent on children five and under. ■ Nearly all foreign adoptions were supported by the

adoption tax credit, but only 1 in 4 foster care adoptions were. 1In

THE FEDERAL ADOPTION TAX CREDIT In 1996, the Adoption Promotion and Stability Act was introduced in the Congress (H.R. 3286) to help families defray adoption costs and to promote the adoption of foster care children. The Act was subsumed in the Small Business Job Protection Act,which Congress enacted in 1996. Since then, the federal individual income tax has included a tax credit to defray the expenses, up to a limit ($10,960 per child in 2006), that are paid in connection with an adoption, including adoption fees, court costs, and attorneys’ fees. Filers only receive the credit if they have tax liability (the credit is non-refundable). If a filer’s tax liability for a particular year is less than their allowable credit, the filer may carry forward the unused credit amount for the next five tax years or until it is all used, whichever comes first. The Economic Growth and Tax Relief Act of 2001 (EGTRA) liberalized the tax credit by increasing the expense limit from $5,000 per adoption ($6,000 for foster care adoptions) to $10,000 in 2002. EGTRA also raised the phaseout range from $75,000-$115,000 of income to $150,000-$190,000 in 2002. Both the expense limit and the phaseout income limit are indexed for inflation. In addition, beginning in 2003, families adopting a child from foster care are able to access the adoption tax credit without needing to document expenses.

some states, youth may stay after their 18th birthday.


use the term foster care here as shorthand for “special needs” foster care. The tax credit is available to support “special needs” foster care adoption, though the vast majority of children adopted from foster care are considered special needs. States set criteria for determining special needs, b