The US Federal Adoption Tax Credit: Dollars for Deception

GAO Study on the Adoption Tax Credit

Posted on November 22, 2011 by SuzanneCWLA 

The Government Accountability Office (GAO) has just released a study on the federal adoption tax credit. From analysis of Internal Revenue Service (IRS) data and documents, observations of IRS examiners, and interviews of IRS officials and other stakeholders, the GAO explored IRS’ communications, processing, and auditing strategy regarding the credit. CWLA and member agencies on our adoption advisory committee were among the stakeholders consulted for this report.

Senator Max Baucus (D-MT) and Representatives Charles Boustany (R-LA) and John Lewis (D-GA) requested the study citing the recent expansion of the credit and to identify possible improvements in advance of the 2012 tax year. The adoption tax credit was first established in 1996. The Affordable Care Act (P.L. 111-148) increased its maximum value from $10,000 to $13,170 and made it refundable for 2010 and 2011. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312) made changes to the law by extending the credit through 2012, but as non-refundable and with a reduced maximum to $10,000. In 2013 and following, it will be limited to special needs adoptions and only available for qualified expenses up to a $6,000 value. Since 1996, $4.28 billion in adoption tax credits have been claimed, with $1.2 billion claimed in 2010.

The GAO determined that in 2011 there was diverse communications approaches to tax preparers and adoption advocates, but identified room for improvement in explaining certification requirements. In addition, they found that over two-thirds of almost 100,000 taxpayers claiming the credit were audited by mail, and that  four-fifths of those audited had filed the credit accurately and none were fraudulent. These audits caused the IRS to expend unnecessary resources and delayed refunds for families. The study concludes with an outline of approaches to avoid both confusion and ineffective process that led to unnecessary expenditures in low yield tax oversight in 2011.

These tax credits support all adoptions equally, though not all adoptions are equal.

The ChildWelfare.gov website states: “The way you choose to adopt will depend on what is important to your family, including your feelings about contact with birth family members, your flexibility about the characteristics of the child you wish to adopt, your resources, and how long you are willing to wait for your child.”

Prospective adopters know this all too well as they shop around and compare costs, ages, health, speed, etc. in deciding whether they prefer to spend their hard earned tens of thousands of dollars domestically or on an import (as few are willing to take the route of nearly cost free adoptions from foster care, the very adoptions these tax credits are intended to help promote.)

Meanwhile, “Politicians from both parties frequently promote tax credits and other incentives to ease the way for adoptive parents to demonstrate that they want to "do something" about abortion. Facilitating adoptions, especially of hard-to-place children, deserves our strong support. But it does nothing to affect the abortion rate,” Cory L. Richards, of the Guttmacher Institute. (Richards, Cory L. 2007. Giuliani's Adoption Fallacy. Oct. 29. Los Angeles Times)

Thus, all adoptions are supported equally by the federal adoption credit tax, despite the differences and the populations that are assisted by each adoption choice.

An estimated 126,951 children were adopted in 1992. Deducting stepparent adoption, which is estimated to be 42%, leaves approximately 73,632 adoptions that were eligible for a tax credit or exclusion (Evan B. Donaldson Adoption Institute. Overview of Adoption in the United States.)  At $10,000, the approximate tax credit for 1992 the total could mean total tax credits in excess of 736 million dollars.

Despite annual increases, the total doesn’t amount to a huge amount of money compared to many other tax breaks and loopholes But, it is hundreds of million dollars in adoption tax credits that are, for the most part, not serving its intended goal and stated purpose.

The Purpose

The federal adoption tax credit legislation was first enacted in 1996 “to encourage further the adoption of special needs children.” Special needs adoptions are recognized as adoption of children from foster care who are older, have disabilities, or require placement with siblings.

In 2004, however, less than a quarter of 
taxpayers claiming the credit adopted children from the U.S. foster care system (Joe Kroll, Executive Director, North American Council on Adoptable Children, "The Adoption Tax Credit: An Ethical Dilemma", 
from Fall 2007 Adoptalk). 

Those who favor of this ever-increasing tax credit for all adoptions, point out that most internationally adopted children have special needs. If not physical they have emotional problems and learning difficulties in terms of language acquisition. The adoption tax credit, however, is not a subsidy for ongoing costs of care for special needs children which adopters are entitled to in addition if their child’s needs qualify. Approximately 15 states also have their own adoption tax credits, in addition to the federal credit and many employers and airlines offer benefits to those who adopt.

The federal adoption tax credit is not a subsidy for ongoing care, but is intended specifically to help defray the fees involved in the initial adoption placement fees, recognizing that such expenses are not covered by medial insurance, as are maternity expenses.

However, as the tax credits increase each year, adoption practitioners raise their fees accordingly assuring clients that they can receive this reimbursement. So, in effect, it can be argued that the tax breaks are really supporting private for- and non-profit adoption agency businesses, which exist to meet a demand for children other than those in foster care. The renowned Evan B. Donaldson Adoption Institute asks: “Is it ethical that intermediaries and those least in need benefit the most from these tax credits?" (Evan B. Donaldson Adoption Institute. 1999. Money, Power and Accountability: The “Business” of Adoption. Evan B. Donaldson Adoption Institute Conference Summary. Anaheim, November 1999).

Those who favor tax support of all adoptions claim that all children deserve good homes. However, it is only adoption from foster care that serves the intended purpose of adoption: finding homes for orphans and children whose parents have been adjudged unable to care safely for them.

All other types of adoption exist to fill the desires of adults wanting a child and often involve exploitation and deceit to meet the market demand. Domestic infant adoption agencies spend millions marketing expectant mothers, often disregarding the rights of fathers, or promising open adoption in states in which they are not enforceable.

Globally, 90% of children in orphanages are not orphans nor have they been victims of abuse or neglect. Many families worldwide use orphanages to provide their children with food, medical care, or education they cannot otherwise afford. They visit their children and have no intention of relinquishing them to unrelated strangers. Child trafficking for adoption has been reported in Central and South America, Asia, Eastern Europe and Africa. To meet the demand, children are kidnapped or stolen from loving parents in China, Guatemala, Armenia, Vietnam, Ethiopia, and elsewhere. They are sold to foreign orphanages, with people posing as their parents and papers forged, and then placed, often unknowingly, by trusted adoption agencies here in the US. When nations close their international adoptions, as many have because of corruption, the number of allegedly “abandoned” babies drops drastically and picks back up again when the adoption programs are resumed.

The tens of thousands that Americans and other Westerners are willing to pay per child is very corrupting in poor nations. It pays bribes and supports a criminal underground. In addition, it is far more difficult for people within these nations who might adopt, to compete with fees of tens of thousands of dollar per child.

Not Meeting It’s Intended Goal and Stated Purpose

Pro-adoption supporters claim that the tax credit makes adoption possible for many good parents who could not otherwise afford adoption. However, the tax credit actually disproportionately supports higher-income families who primarily adopt very young children internationally or privately. Nearly all international adoptions are supported by the tax credit, but only one in four foster care adoptions were.

The counter argument is that anyone can adopt a child from US foster care for minimal fees that are well within the means of any working family or single person. Of course, not everyone is ready to take on children who come with the baggage of siblings, age, or disabilities.  And surely no one should take on more than they can handle as a disrupted adoption is worse for a child than no adoption. Yet, while each potential adopter is free to choose, the question remains as to whether all choices should be supported by taxpayers equally.

Elizabeth Samuels found that “federal tax benefits for adopters generally provide greater benefits to families involved in more expensive healthy newborn and international adoptions, although the benefits are promoted as a means to increase adoptions of children out of foster care"(Elizabeth J. Samuels, 2005. Time To Decide? The Laws Governing Mothers’ Consents To The Adoption Of Their Newborn Infants. 72 Tenn. L. Rev. 509, p. 523).

A summary of the data from the U.S. Treasury Department to determine who most benefits from the credit reveals:
•    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.
•    The tax credit primarily supports the adoption of younger children.

In 2004 just 18 percent of children supported by the credit and 17 percent of money spent assisted children from foster care. In 2005, nearly 90 percent of filers with incomes above $100,000 adopted internationally or privately, and 71 percent of all families adopted children under age five. Only about 10 percent of higher-income families adopted from foster care, and very few adopted older children.

As of 2010, the Adoption Tax Credit allows full reimbursement for up to 13,170 per attempt to adopt for. A tax credit is far more beneficial than a tax deduction, or as one blogger called it “free money.”  Those who adopt are also entitled to an additional tax credit of $1000 every year the child is a dependent in their home, and an additional $3,300 for each person in the family. Those in a 25% tax bracket, receive a reduction of $825 (25% of $3,300).

Many adoptions involve at least part of the cost (often approximately $2000) going to a charitable orphanage. This can be treated as a charitable deduction for tax purposes results in an additional $500 for those in the 25% tax bracket. And, some states offer tax incentives for adoption as well.

The Evan B. Donaldson Adoption Institute, the nations most renowned authority on adoption reports that the federal “offers financial incentives in the form of tax credits to families who privately adopt infants (and who are often affluent), yet does not offer the same support to those families who adopt children in foster care (and who usually have the greatest need for such support)"(Evan B. Donaldson Adoption Institute. 1999).

“Today’s reality,” says Joe Kroll of the North American Council on Adoptable Children (NACAC) “is that the original intent of the adoption tax credit legislation has been turned upside down. Those who most need support to adopt (lower-income families who are adopting children from foster care) are receiving the least benefit, and those for whom the financial outlay is not a barrier to adoption benefit the most” (Kroll, Joe. NACAC's Executive Director, (2009). “The Adoption Tax Credit: An Ethical Dilemma” Fall Adoptalk).

Family Preservation proponents argue that no tax credits are given to original blood kin family – natural mothers, fathers and extended family members who could then afford to safely nurture their own children inasmuch as more and more domestic adoptions – in addition to those throughout the world – are a result of poverty far more than any other cause (abuse, neglect) combined. Origins, Inc points out that the adoption tax credit annually costs the treasury more than it spends on Title IV-B, part 2—the Promoting Safe and Stable Families program. 

Creating Equitable Changes

All adoptions are not equal and the differences are evident to those who chose which child they will adopt from where. Currently, the greatest number of children available for adoption are in foster care, however as the United Nations notes, the emphasis of child adoption “has changed from the desire to provide a needy child with a home, to that of providing a needy parent with a child” (The Special Rapporteur, United Nations, Commission on Human Rights, 2003.)

We need to ask if it makes sense to continue to promote, encourage and support all choices of adopters based on what is best for them, rather than what is in the best interest of children in need and the greater social good.

Legislators need to understand the dynamics of where this expenditure is going and not continue to simply sign off on increases each year under the misconception that it is helping special needs children.  The Federal Adoption Tax Credit needs to be limited to adoptions to the adoption of children from foster care. All other adoptions are personal choice, do not help reduce US tax costs and thus should be completely paid for those who make those choices, not the government.

Limiting the tax credit to foster adoptions – as it is intended and claims to be – would end government support of questionable adoptions and instead help encourage adoptions that serve an estimated 120,000 of a total of half a million children in state care who could be adopted while reducing the tax burden on states who subsidize foster care.

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The GAO is government "watchdog" agency.if you feel as strongly about the adoption tax credit as I do, you can join me in writing to them at: Government Accountability Office, 441 G St., NW,
Washington, DC 20548 (202) 512-3000 and by email at: contact@gao.gov

Letters should also be written to the following:

The Honorable Max Baucus
Chairman
Committee on Finance
United States Senate

The Honorable Charles W. Boustany, Jr.
Chairman
The Honorable John Lewis
Ranking Member
Subcommittee on Oversight
Committee on Ways and Means
House of Representatives