Adoption Tax Credit Not Fulfilling Original Purpose

Washington, DC –  As Congress considers extending the federal adoption tax credit, a new Child Trends research brief summarizing U.S. Treasury data finds that the vast majority of adoption tax credit dollars support children adopted privately or from foreign countries, while the original intent of the tax credit was to promote adoption of U.S. foster children.  The research brief, entitled The Adoption Tax Credit: Is It An Effective Approach to Promote Foster Care Adoption?, also shows that the tax credit disproportionately supports higher income families.   


Congress enacted the federal adoption tax credit in 1996 to help families defray adoption costs and to promote the adoption of foster care children.  In 2001, Congress increased the tax credit from $5,000 to $10,000 per adoption and raised the phaseout range from $75,000- $115,000 of income to $150,000-$190,000.  Both the credit and phaseout range are indexed for inflation.


The research brief finds:


  • Private adoptions accounted for almost half of the children supported by the adoption tax credit, and 38 percent of the dollars spent on the credit in 2004, the last year for which data are available.

  • Foreign adoptions accounted for just over one-third of the children supported, but 45 percent of the dollars spent.

  • Foster care children accounted for 18 percent of the children supported and 17 percent of the dollars spent.

In addition, two-thirds of the total dollars spent on the tax credit in 2005 were received by families with incomes above $75,000; 40 percent of the benefits went to those earning more than $100,000. The type of adoption varies greatly by income:


  • Foreign adoptions accounted for more than 45 percent of adoptions by tax credit recipients with incomes above $100,000 compared with 20 percent of adoptions among recipients with incomes below $50,000.

  • Foster care adoptions accounted for about 10 percent of the adoptions by tax credit recipients with incomes over $100,000, compared with more than 25 percent of the adoptions among recipients with incomes below $50,000 


The research brief also finds that parents are much likely to claim the tax credit for foreign adoptions than for foster care adoptions—nearly all foreign adoptions were supported by the credit in 2004, but only 1 in 4 foster care adoptions were. 


“We need to educate parents who adopt foster children about this tax credit,” says Rob Geen, Child Trends’ Vice President for Public Policy and Director of Child Welfare Research.  “We should also consider alternative approaches, such as supporting state and local efforts to recruit adoptive parents or supporting post-adoption services, since the tax credit may not be the most effective means of increasing the adoption of foster children.” 


The Child Trends brief is based on a new U.S. Treasury Department report, Federal Income Tax Benefits for Adoption: Use by Taxpayers 1999-2005.


Child Trends is a nonprofit, nonpartisan research center serving those dedicated to creating better lives for children.