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 Adoption is a long and often emotionally laborious process. One of the many stressors for families is the financialchallenge of adopting. Since its inception in 1997, the adoption tax credit has helped many thousands of middle-income American families defray the high costs of adoption, making adoption a reality and providing loving, permanentfamilies for millions of children who might have otherwise languished in foster care or institutions.
This introductory article covers various aspects of the adoption tax credit which can be a helpful resource for adoptive parents.
 
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National Council For Adoption
225 N. Washington Street•Alexandria, VA 22314•(703) 299-6633•www.adoptioncouncil.org
TAX BENEFITS FOR ADOPTION:THE ADOPTION TAX CREDIT*
 Author: Herbert Newell, M.A.
†
Introduction
Adoption is a long and often emotionallylaborious process. One of the many stressors for 
families is the financial challenge of adopting. Since
its inception in 1997, the adoption tax credit has
helped many thousands of middle-income American
families defray the high costs of adoption, makingadoption a reality and providing loving, permanentfamilies for millions of children who might haveotherwise languished in foster care or institutions.
History
After years of advocacy by adoption organi-zations, including the National Council For Adoption (NCFA), the Federal Adoption TaxCredit went into effect for tax year 1997. Thisinitial adoption assistant program was part of the1996 Small Business Job Protection Act and setthe maximum credit at $5,000 per child ($6,000 per child with special needs), and allowed for thecredit to sunset (expire) on December 31, 2001.In 2001, Congress passed parts of PresidentBush’s tax incentive package, the EconomicGrowth and Tax Relief Reconciliation Act of 2001.
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This act extended the adoption tax credituntil December 31, 2010 and increased the initialmaximum credit to $10,000 per child (for bothspecial needs and non-special needs adoptions)and also indexed this amount for inflation annually.The process of indexing the credit allows for adjusting the maximum allowed amount annuallyfor inflationary factors as they pertain to adoptionand the economy. The credit for adopting a childwith special needs was made permanent with thisact. For 2010, the indexed tax credit maximumwas $13,170 per child.
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Where Things Currently Stand
The adoption tax credit as provided for in the2001 legislation was set to sunset in tax year 
*This information is provided for general educational purposes and is not meant as tax advice. This is a general summary and does notcover every specific tax issue and is not inclusive of every situation. You should consult a competent tax adviser for individual adviceregarding your own situation.
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Economic Growth and Tax Relief Reconciliation Act of 2001. Pub. L. No. 107-16 (2001).
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IRS. (2009).
 Expansion of adoption tax credit 
. Retrieved from http://www.irs.gov/formspubs/article/0,,id=177982,00.html
Updated: March 2011
  A 
doption
  A 
dvocate
A pUBlicAtioN oF thE NAtioNAl coUNcil FoR AdoptioN
No. 21 • FEBRUARY 2010
NICOLE FICERE CALLAHAN, EdItORCHuCk JOHNsON, EdItORELIsA ROsMAN, PH.d., EdItOR
 
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Adoption Advocate
2010 unless it was renewed by Congress. ThePatient Protection and Affordable Care Act of March 2010 temporarily increased the adoptionexpense credit and fringe benefit exclusion limitfor adoption assistance programs and made thecredit refundable. The changes are effective for tax years beginning after Dec. 31, 2009.This extension allows for the maximumadoption credit to be increased to $13,170 per eligible child. This increase applies to both non-special needs adoptions and special needs adop-tions. Also, the adoption credit is made refund-able, meaning that families will realize the full benefit regardless of taxes paid. The scheduledsunset relating to the adoption credit is delayedfor one year (i.e., the sunset becomes effectivefor tax years beginning after Dec. 31, 2011).On December 17, 2010 the 2010 Tax Relief Act was signed into law which extended the Bushera tax cuts through tax year 2012. The extensionfor tax year 2012 is not refundable as it is withthe Patient Protection and Affordable Care Actwhich only applies for tax years 2010 and 2011.If the adoption tax credit is allowed to expireafter this current extension, the maximum taxcredit for the adoption of children with specialneeds would decrease to $6,000 per child, withthe credit for adoptions of non-special needschildren expiring altogether.
Adoption Tax Credit
For the tax year 2010, the maximum adop-tion tax credit was $13,170 per child for qualifiedadoption expenses. The tax credit phase-out began for taxpayers with a modified adjustedgross income (AGI) in excess of $182,180, andwas completely phased out for taxpayers with amodified AGI of $222,180 or higher.The Internal Revenue Code §23(a)
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definesthe adoption tax credit as follows: “In the case of an individual, there shall be allowed a creditagainst the tax imposed by this chapter theamount of the qualified adoption expenses paid or incurred by the taxpayer.”Furthermore, the Code defines “QualifiedAdoption Expenses” to be “reasonable and neces-sary adoption fees, court costs, attorney fees, andother expenses which directly relate to, and the principle purpose of which is for, the legal adop-tion of an eligible child by the taxpayer.”Examples of qualified expenses include fees paidto an adoption agency, legal fees, travel-relatedexpenses, all official costs, and any other reason-able cost associated with adopting the identifiedchild. Excluded expenses include any expensesdeemed illegal by State or Federal Statute,expenses for surrogate parenting arrangements,expenses related to step-parent adoption, or expenses reimbursed through grants or employer assistance programs.The Code further defines an “eligible child”to be “an individual who has not attained age 18or is physically or mentally incapable of caringfor himself.” To apply for the credit, married cou- ples must file a joint return and the maximumcredit limits are the same for both married cou- ples and single adoptive parents.The adoption tax credit differs from a deduc-tion, exclusion, or exemption in that it actuallyreduces, dollar-for-dollar, the taxpayer’s tax lia- bility by subtracting the amount from taxes owed.A tax credit is specifically different from a deduc-tion, in that while a tax credit offsets a taxpayer’stax liability, a deduction offsets income from ataxpayer’s adjusted gross income to come to tax-able income (the amount of income taxable).Therefore, a tax credit is much more advanta-geous than a deduction, because the tax credit is arefund of applicable taxes to offset the cost of adoption. More simply, an adoptive parent’s taxdollars go to fund approved adoption expensesrather than the federal government.With the exceptions of tax years 2010 and2011, the adoption tax credit has historically been
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For a copy of the tax code referenced throughout this document, see: http://www.law.cornell.edu/uscode/26/23.html
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