	Introduction

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 Adoption Tax Credit

The adoption tax credit 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 spouse's child), there are some special rules related to claiming the credit for intercountry adoptions and for adoption of children with special needs. 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 $207,140 and is phased out completely for taxpayers with more than $247,140 in income (these amounts are subject to annual inflation adjustment). However, the credit may be carried forward and claimed on future tax returns for up to five years after initially claimed. Instead, for the purposes of these tax benefits, special needs adoptions are the adoptions of children whom the state child welfare agency considers difficult to place for adoption. The Exclusion for Employer-Provided Adoption Assistance

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 maximum amount that can be excluded from the taxpayer's income is capped at a maximum amount per adoption which is the same maximum amount of the credit: $13,810 in 2018. Taxpayers can claim the exclusion and the credit concurrently for the same adoption, but cannot claim both tax benefits for the same expenses. Specifically, from 2002 through 2010, the law 
extended the adoption credit for the adoption of children other than special needs children; increased the maximum credit and exclusion amount from $5,000 ($6,000 for a special needs child) to $10,000 per eligible child, including special needs children (this amount was adjusted annually for inflation); provided that for the adoption of special needs children the credit and exclusion amount equal the maximum credit and exclusion amount ($10,000) regardless of actual expenses (this amount was adjusted annually for inflation occurring since 2002); and increased the income level at which the credit and exclusion phased out from $75,000 to $150,000 (these amounts were adjusted annually for inflation). There is currently little evidence, however, that adoption tax benefits are an effective policy tool to increase adoptions. As previously discussed, the vast majority of adoption tax benefits go to upper-income Americans, even though data suggest that a significant number of lower- and middle-income Americans adopt. Challenges with Administering Adoption Tax Benefits

Recent evidence suggests that adoption tax benefits have been difficult for the IRS to administer to keep both erroneous benefit claims and taxpayer burden low. Congress may in the future seek further modifications to the credit or exclusion for employer-provided adoption assistance to achieve certain policy goals. Replace the Current Tax Benefits with a Direct Spending Program

Given that there is little evidence that adoption tax benefits increase adoptions, Congress may be interested in eliminating these benefits and replacing them with direct spending on adoption, especially if it views a direct spending program as more effective at encouraging adoptions. Alternatively, Congress could eliminate adoption tax benefits and direct any additional revenue to deficit reduction. Make the Credit Refundable

Congress could choose to make the adoption tax credit refundable, so that taxpayers with little or no tax liability could claim the entire value of the credit in a given year.
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 adoption tax credit 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 spouse's child), there are some special rules related to claiming the credit for intercountry adoptions and for adoptions of children with special needs (generally 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 $207,140 and is phased out completely for taxpayers with more than $247,140 in income (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 which is the same maximum amount of the credit: $13,810 in 2018. 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 the exclusion for employer-provided adoption assistance.
The legislative history of the current adoption tax benefits indicates that Congress enacted these incentives to encourage more adoptions. However, there is currently little evidence that 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, the 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, recent evidence suggests that adoption tax benefits have been difficult for the IRS to administer in terms of keeping both erroneous benefit claims and taxpayer burden low.
In light of these concerns with current adoption tax benefits, Congress may consider modifying the 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 views direct spending as more effective at encouraging adoptions. Alternatively, Congress could eliminate adoption tax benefits and direct any additional revenue to deficit reduction. Congress could also choose to make the adoption tax credit refundable, so that taxpayers with little or no tax liability 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 could modify some of the eligibility rules or methods to make the credit easier to administer.