Report to The Congress on

Tax Benefits for Adoption

Department of the Treasury

October 2000


v

TABLE OF CONTENTS

CHAPTER I: INTRODUCTION AND SUMMARY................................................................ 1

MANDATE FOR THE STUDY................................................................................................. 1

DATA ON ADOPTIONS ........................................................................................................... 1

SUMMARY OF UTILIZATION OF TAX BENEFITS ON 1998 RETURNS........................... 2

GENERAL OBSERVATIONS................................................................................................... 3

OUTLINE OF THE STUDY ...................................................................................................... 4

CHAPTER II: FEDERAL TAX BENEFITS FOR ADOPTION............................................. 7

HISTORY.................................................................................................................................... 7

Economic Recovery Tax Act of 1981 ..................................................................................... 7

Tax Reform Act of 1986 .........................................................................................................8

CURRENT LAW ........................................................................................................................ 8

Tax Credit................................................................................................................................ 9

Exclusion for Employer-Paid or Employer-Reimbursed Benefits .......................................... 9

Common Provisions of the Tax Credit and Employer Exclusion ......................................... 10

CHAPTER III: BACKGROUND ON ADOPTION................................................................ 13

DATA ON THE NUMBER OF ADOPTIONS ........................................................................ 13

FAMILIES SEEKING TO ADOPT A CHILD ......................................................................... 15

CHILDREN AVAILABLE FOR ADOPTION ......................................................................... 16

COSTS OF ADOPTION........................................................................................................... 17

CHAPTER IV: USE OF ADOPTION TAX BENEFITS FOR 1997 AND 1998 .................. 19

HIGHLIGHTS OF FEDERAL INCOME TAX BENEFITS FOR ADOPTION, 1997 AND

1998........................................................................................................................................... 19

Adoption Expenses and Benefits by Income......................................................................... 21

Adoptions by Type of Adoption, Income, and Marital Status............................................... 24

Use of Adoption Benefits in Two Successive Years............................................................. 24

DETAILED TAX RETURN DATA, 1997 AND 1998 ............................................................ 25

Tax Return Data for 1997...................................................................................................... 25

Tax Return Data for 1998...................................................................................................... 26
vi

Data Sources And Limitations .............................................................................................. 27

CHAPTER V: OBSERVATIONS CONCERNING FEDERAL TAX BENEFITS FOR

ADOPTIONS ............................................................................................................................... 49

BENEFICIARIES OF THE ADOPTION TAX PROVISIONS................................................ 49

Income Ranges for Receiving Benefits ................................................................................. 49

Situations in Which Adoption Tax Benefits Are Not Available........................................... 51

Benefits by Type of Adoption ............................................................................................... 51

Relationship of Reported Expenses to the Maximum Credit or Exclusion........................... 52

Exclusion for Employer-Paid or Employer-Reimbursed Adoption Benefits ........................ 52

GENERAL ISSUES REGARDING TAX BENEFITS............................................................. 53

COMPLEXITY AND TAXPAYER BURDEN........................................................................ 55

ADMINISTRATIVE ISSUES................................................................................................... 55

APPENDIX A: INCOME TAX FORM AND INSTRUCTIONS FOR ADOPTION

BENEFITS FOR 1998................................................................................................................. 57

APPENDIX B: FEDERAL EXPENDITURE PROGRAMS FOR ADOPTION.................. 65

TITLE IV-E ADOPTION ASSISTANCE PROGRAM............................................................ 65

TITLE IV-B, SUBPART 1, CHILD WELFARE SERVICES PROGRAM ............................. 66

TITLE IV-B, SUBPART 2, PROMOTING SAFE AND STABLE FAMILIES PROGRAM.. 66

ADOPTION OPPORTUNITIES GRANT PROGRAM ........................................................... 66

ADMINISTRATION INITIATIVES ........................................................................................ 66

ADOPTION AND SAFE FAMILIES ACT OF 1997............................................................... 67

CHILD WELFARE DEMONSTRATION WAIVERS ............................................................ 67

COURT IMPROVEMENT PROGRAM .................................................................................. 67
1

Chapter I

INTRODUCTION AND SUMMARY

MANDATE FOR THE STUDY

The Small Business Job Protection Act of 1996, P.L. 104-188, included two related tax

provisions to assist families who adopt children, to be effective beginning in tax year 1997. The

first provision is a tax credit of 100 percent of the first $5,000 per adoption ($6,000 for adoptions

of children with special needs) of qualified expenses paid in the adoption process.1

 The second

provision is an exclusion of up to $5,000 per adoption ($6,000 for adoptions of children with

special needs) for certain employer-paid or employer-reimbursed adoption expenses.2 Taxpayers

may use both provisions for a single adoption, but not for the same expenses. Benefits are

phased out above certain income levels. Neither the tax credit nor the exclusion applies to

adoptions by stepparents. The tax credit generally sunsets after 2001, but is permanent with

respect to adoptions of children with special needs. The employer exclusion sunsets after 2001.

The Small Business Job Protection Act also included a provision directing the Secretary

of the Treasury to “study the effect on adoptions” of the tax credit and exclusion and to submit a

report of the study to the House Ways and Means Committee and the Senate Finance

Committee.3

 This report is in response to the Congressional mandate and is based on data

regarding taxpayers’ use of both adoption provisions during their first two years of availability,

tax years 1997 and 1998.

DATA ON ADOPTIONS

The most recent comprehensive effort to collect adoption statistics reported that a total of

127,000 children were adopted in 1992 (including 53,000 stepparent adoptions).4, 5 However,

this estimate slightly understates the total number of adoptions because it does not include

adoptions of foreign children in States that do not use the State courts to report adoptions. Based

on the limited data for 1997, there appear to have been about 130,000 adoptions in 1997.

Assuming no further change in the total and no further change in the number of stepparent

adoptions implies that about 77,000 adoptions completed were potentially eligible for the credit

 

1

 Section 1807 of the Act and section 23 of the Internal Revenue Code of 1986.

2

 Section 1807 of the Act and section 137 of the Internal Revenue Code of 1986.

3

 Section 1807(d) of the Act.

4

 Flango, Victor and Flango, Carol, “How Many Children Were Adopted in 1992,” Child Welfare,

Vol. LXXIV #5, September/October 1995. pp. 1018-1031.

5

 For ease of discussion and to avoid the appearance of undue precision, numbers of taxpayers and

adoptions have been rounded in the text. Computed amounts, such as average expenses, have been

calculated from the unrounded values.
2

or exclusion in 1998, the latest year for which tax return data are available.6 The number of

adoptions that actually received benefits in 1998 was about 50,000. Two major factors account

for the approximately 27,000 potentially eligible adoptions that did not receive tax benefits for

1998. First, the costs of adopting children with special needs are eligible for reimbursement

through government expenditure programs, and, in many cases, these reimbursements appear to

fully cover the costs of the adoptions. There were 31,000 adoptions of children with special

needs in 1998, only 4,700 of which received tax benefits. Second, the tax benefits for adoption

are available only to taxpayers with modified adjusted gross incomes below $115,000.

SUMMARY OF UTILIZATION OF TAX BENEFITS ON 1998 RETURNS

All adoptions. For tax year 1998, 45,300 taxpayers received income tax benefits for

$297 million of adoption expenses paid or reimbursed in connection with 50,400 adoptions.

44,700 taxpayers received benefits from the tax credit. Thirty-nine hundred taxpayers received

tax benefits from the exclusion, of whom only about 600 did not also benefit from the tax credit.

Adoption expenses generated $133.5 million of tax credits (99 percent of total tax benefits), and

exclusions for employer reimbursements generated $1.7 million of tax reduction (1 percent of

total tax benefits), for a total of $135.2 million. Including carry forwards of unused credits from

1997, taxpayers were able to use adoption tax credits of $104.3 million in 1998.7

 Taxpayers

carried forward to 1999 unused 1997 and 1998 tax credits of $53.4 million.

 Adoption expenses reported on 1998 tax returns averaged $5,890 per adoption. Fifty-one

percent of returns reported adoption expenses (including employer reimbursements) of under

$5,000; 64 percent were under $6,000; and 25 percent were over $10,000.

Adoptions of children with special needs. Tax benefits were received in 1998 for

expenses reported in connection with the adoptions of 4,700 children with special needs, or only

about 15 percent of all adoptions of children with special needs. Apparently, the out-of-pocket

costs of the other 85 percent of the adoptions of children with special needs (which otherwise

would be eligible for the tax benefits) were covered by non-tax government programs. Only 8

percent of total adoption tax benefits generated were for adoptions of children with special needs.

The associated expenses for adoptions of children with special needs for whom tax

benefits were received generated $10.7 million of tax benefits, all but $0.1 million of which were

from the tax credit. Average adoption expenses were $3,540 per adoption, which is 40 percent

lower than for adoptions overall. Sixty-six percent of returns reported adoption expenses of

under $5,000; 71 percent were under $6,000; and 12 percent were over $10,000.

 

6

 Because 1997 was the first year in which adoption tax benefits were available, some taxpayers

may have failed to report adoption tax benefits on their initial 1997 returns. Even if such benefits were

later claimed on amended tax returns, they are not included in the data used for this report. See Chapter

IV for further discussion.

7

 Tax credits generated in a year but which cannot be used because they exceed tax liability may

be carried forward and used during the five subsequent years.
3

Adoptions of foreign children. The 14,300 adoptions of foreign children for 1998

generated $50.4 million of tax benefits (37 percent of the total), all but $0.6 million of which

were from the tax credit. Average reported adoption expenses were $9,876 per adoption, which

is more than twice the average for non-foreign, non-special needs children. Twenty-three percent

of taxpayers with adoptions of foreign children reported expenses of less than $5,000, 37 percent

reported expenses of under $6,000, and 52 percent reported expenses of more than $10,000.

Families undertaking adoptions of foreign children tended to have higher average incomes than

other adoptive families.

Distribution of benefits. Families need substantial income in order to use the benefits

from the maximum possible tax credit. A family without any other dependents would need to

have at least $52,400 of income (in 2000) to fully utilize a $5,000 adoption tax credit in one year.

An annual income of $24,650 would be required to use such a benefit over a six year period,

although in that situation the tax benefit would not be able to offset adoption expenses as they

were paid.8

 Higher levels of income would be necessary if taxpayers itemize deductions, use

other tax credits such as the child and dependent care credit, have additional children, or

undertake additional adoptions.9

Families with incomes of less than $25,000 undertook only about 7 percent of the

adoptions in 1998 for which tax benefits were reported. Because of their low tax liability, such

families must carry forward most of the adoption tax credits they do generate.

GENERAL OBSERVATIONS

Adopting families generally incur significant expenses related to the adoption. The

adoption tax provisions help these families meet their adoption expenses. The provisions may

also encourage additional families to consider adoption. The effect of the provisions on the

number of adoptions is likely to vary by the type of adoptive child.

Adoptions of non-foreign, non-special needs children. There is substantial evidence

that the number of healthy, non-foreign infants available for adoption is less than the number of

families seeking to adopt such infants. Thus, tax benefits cannot be expected to increase the

number of such adoptions. Even without changing the total number of adoptions of healthy nonforeign infants, tax benefits may increase the number of families, especially middle-income

families, seeking to adopt and may change the mix of income levels of families that are

successful.

Adoptions of foreign children. By lowering the net costs of adoption, the tax benefits

for adoption may increase the number of adoptions of foreign children. The number of adoptions

 

8

 To use the full $6,000 credit for adoption of a special needs child in one year would require a

minimum income of $59,100. To use it over six years would require income of at least $25,750. See

Table 5-1.

9

 Required incomes in future years would be higher due to the annual indexing of personal

exemptions, the standard deduction, and tax bracket widths for the effects of inflation.
4

of foreign children has been increasing, although the annual increases began prior to enactment

of the tax benefits.

Adoptions of children with special needs. The effect of the adoption tax benefits on the

number of adoptions of children with special needs is uncertain. By lowering the costs to

adopting families, the tax benefits provide an incentive to adopt a larger number of children with

special needs in cases in which their adoption expenses would not be fully paid by direct

expenditure programs. Conversely, the tax provisions lower the costs for adoptions of foreign

children by a greater amount than for the adoptions of children with special needs. This decrease

in the relative price of adopting foreign children compared to adopting children with special

needs decreases the relative incentive to adopt children with special needs. Although the number

of adoptions of children with special needs continues to increase, that increase may be related to

private and other government efforts. Available data do not permit a determination of whether

the adoption tax benefits have increased, decreased, or not affected the number of adoptions of

children with special needs relative to the number of such adoptions that would have occurred in

the absence of the tax benefits.

Effect of tax benefits on qualified adoption expenses. Because the adoption tax credit

is 100 percent of qualified expenses (up to the statutory limits), adopting families whose total

qualified adoption expenses are below the statutory limits and who can fully utilize the tax credit

do not have a financial incentive to minimize expenses. The availability of tax benefits for

adoption also might permit some charges to adopting families to be increased over the levels

charged in the absence of such tax benefits. To the extent that occurs, not all of the benefits from

the tax provisions for adoption accrue to adopting families.

Administrative burdens. Although obtaining benefits for adoption through the tax

system may impose lower administrative burdens on taxpayers than would a direct expenditure

program, the tax provisions are complex and do impose burdens. The tax form for claiming

adoption benefits is one of the more complicated tax forms that lower- and middle-income

taxpayers use, even though the requirements for the tax form are directly related to the statutory

elements of the provisions and include the minimum information necessary to compute the

benefits and alert the Internal Revenue Service that benefits are being claimed. IRS

examinations of tax returns reporting adoption expense also add to the administrative burdens of

adoptive families, and it is labor intensive for the IRS to verify the adoption expenses claimed on

tax returns as the basis for the adoption tax credit. Taxpayers incur additional computational

burdens if they wish to obtain the tax benefits earlier through reduced withholding on wages and

salaries rather than obtaining them later through a tax refund.

OUTLINE OF THE STUDY

Chapter II provides detailed information on the Federal income tax provisions for

adoption assistance. Chapter III provides background information on adoption. Chapter IV

presents and summarizes data on taxpayers’ use of the Federal income tax benefits for adoptions

in 1997 and 1998. Chapter V contains observations about the tax benefits for adoption with

emphasis on their structure, their beneficiaries, their complexity, and various administrative
5

issues. Appendix A includes a copy of the IRS tax form (Form 8839) and instructions that are

used by taxpayers claiming the adoption tax benefits. Appendix B outlines the various Federal

expenditure programs that facilitate and assist adoptions.

7

Chapter II

FEDERAL TAX BENEFITS FOR ADOPTION

Three major changes in tax benefits for adoption have been enacted since 1981. The

Economic Recovery Tax Act of 1981 (ERTA) provided, beginning for 1981, an itemized

deduction for up to $1,500 per adoptee for qualified adoption expenses paid in connection with

the adoption of a child with special needs. That deduction was repealed, effective in 1987, by the

Tax Reform Act of 1986, which replaced the income tax benefit with a direct expenditure

program to continue Federal support for families adopting children with special needs. In 1996,

a tax credit and an exclusion for employer-paid benefits were enacted in the Small Business Job

Protection Act of 1996, effective beginning in tax year 1997. The credit and the exclusion both

provide benefits for adoption of children with special needs and other children.

The first section of this chapter reviews the history of the changes in the tax provisions

for adoption since 1981. The second section explains the current provisions.

HISTORY

Economic Recovery Tax Act of 1981

The Economic Recovery Tax Act of 1981 (ERTA) added an itemized deduction for

qualified adoption expenses paid by an adopting parent in connection with the adoption of a

“child with special needs.”1

 The deduction was “intended to encourage, and reduce the financial

burdens in connection with, the adoption of children who have special needs.”2

The aggregate amount that could be deducted with respect to the adoption of one child

was limited to $1,500. For purposes of the deduction, qualified adoption expenses were defined

as reasonable and necessary adoption fees, court costs, attorney’s fees, and other expenses which

are directly related to the legal adoption of a child with special needs. A “child with special

needs” was defined as a child with respect to whom adoption assistance payments were made

under section 473 of the Social Security Act.3, 4

 In general, a child with special needs is one

who: (1) the State has determined cannot or should not be returned to the home of the natural

parents; and (2) unless adoption assistance is provided, cannot reasonably be expected to be

adopted because of a specific factor or condition (such as ethnic background, age, membership in

 

1

 Section 125 of ERTA. Section 222 of the Internal Revenue Code of 1954.

2

 U.S. Congress, Joint Committee on Taxation, General Explanation of the Economic Recovery

Tax Act of 1981. P. 57.

3

 A refusal to accept adoption assistance payments by an individual to whom such payments were

available did not preclude the tax deduction.

4

 Adoption assistance under the Social Security Act provided ongoing maintenance payments but

did not reimburse adoption expenses.
8

a minority group, being part of a group of siblings awaiting adoption together, medical condition,

or physical, mental, or emotional handicap).

Tax Reform Act of 1986

In his State of the Union address in January 1984, President Reagan directed the Treasury

Department to undertake a study of the entire tax system with a view to making reforms to

promote fairness, simplicity, and incentives for growth. The November 1984 Treasury report to

the President recommended that the deduction for qualified adoption expenses of a child with

special needs be repealed and that a direct expenditure program be enacted in its place.5

 The

same recommendations were included in President Reagan’s subsequent report to the Congress

in May 1985.6

The Tax Reform Act of 1986 followed the recommendations of the Administration

regarding adoptions of children with special needs. The itemized deduction for expenses

incurred in such adoptions was repealed, effective after tax year 1986.7 The Act also amended

the adoption assistance program in Title IV-E of the Social Security Act to provide matching

funds for adoption expenses of any child with special needs who has been placed for adoption in

accordance with applicable State and local law.8 Generally, States were required to reimburse

families for eligible costs, and the Federal matching share was 50 percent up to a maximum

Federal share of $1,000.

CURRENT LAW

Current law includes two separate, but related, Federal income tax benefits for adoption:

a 100 percent tax credit for qualified adoption expenses paid by the taxpayer; and an exclusion

from income subject to tax for employer-paid or employer-reimbursed adoption expenses. Both

programs provide tax benefits for adoptions of children with special needs and adoptions of other

children, but adoptions of a spouse’s child (i.e., stepchild adoptions) are not eligible. For each

adoption, benefits are limited to the first $5,000 of qualified adoption expenses paid by the

taxpayer and the first $5,000 of employer payments or reimbursements, whether in one year or

over several years. The limit is increased to $6,000 for each adoption of a child with special

needs. The same expenses cannot qualify for tax benefits under both programs; however, a

taxpayer may use the benefits of the exclusion and the tax credit for different expenditures. Tax

benefits are not available for any expenses paid or reimbursed under any government or nongovernment program. Under both programs, benefits are phased out for higher-income

 

5

 U.S. Department of the Treasury, Tax Reform for Fairness, Simplicity, and Economic Growth:

The Treasury Department Report to the President. Volume 2, General Explanation of the Treasury

Department Proposals. November 1984. P. 120.

6 The President’s Tax Proposals to the Congress for Fairness, Growth, and Simplicity. May,

1985. P. 109.

7

 Section 135 of the Act repealed section 222 of the Internal Revenue Code of 1954.

8

 Section 1711 of the Act.
9

taxpayers. Both of the current tax benefits expire at the end of 2001, except that the tax credit for

adoption expenses associated with adoptions of children with special needs is permanent.

Both provisions were enacted in the Small Business Job Protection Act of 1996 and

became effective for expenses paid on or after January 1, 1997. The provisions were intended to

address the fact that financial costs may be a barrier to adoption. The legislation also was

intended to further encourage the adoption of children with special needs.

The remainder of this chapter provides greater detail about the tax credit and employer

exclusion.

Tax Credit

A taxpayer may be entitled to a tax credit of 100 percent of the first $5,000 (or $6,000 for

adoption of a child with special needs) of qualified adoption expenses paid in connection with an

adoption.9

 Qualified expenses do not include expenses covered by employer reimbursements,

whether those reimbursements are excludable or taxable. Qualified expenses also do not include

any expenses which are paid or reimbursed under any other government or non-government

program. Taxpayers may take the credit for qualified expenses in more than one year, so long as

the total does not exceed the appropriate limit per adoption. The amount of the tax credit

otherwise allowable is phased out ratably over a $40,000 modified adjusted gross income range,

beginning at $75,000 and ending at $115,000.10 Unused tax credits may be carried forward and

used during the five subsequent years.

Exclusion for Employer-Paid or Employer-Reimbursed Benefits

Employer payments or reimbursements for qualified adoption expenses are excludable

from the employee’s income if the expenses are paid under a non-discriminatory employer

plan.11, 12 The amount of the excluded employer payments is limited to a cumulative amount of

$5,000 per adoption, except that the limit is $6,000 in the case of an adoption of a child with

special needs. Employer payments may be excluded in more than one year, but the total

 

9

 The per adoption limit is cumulative for all years for the particular adoption and is the maximum

amount that may be taken into account in connection with the taxpayer’s effort to adopt an eligible child,

including qualified expenses paid in any unsuccessful attempt to adopt an eligible child before

successfully finalizing the adoption of another eligible child.

10 The phaseout range is the same for married taxpayers filing joint returns, for single taxpayers,

and for unmarried heads of household.

11 Employer benefits that are excludable for income tax purposes are still subject to Social Security

and Medicare taxes.

12 Employer-paid or -reimbursed benefits include those paid under salary reduction plans which do

not represent an additional payment by the employer.
10

exclusion for a single adoption may not exceed $5,000 (or $6,000).13 The exclusion is phased

out generally over the same income range as the adoption tax credit except that, for purposes of

determining the phaseout of the employer exclusion, modified adjusted gross income includes all

employer payments or reimbursements for adoption expenses, whether or not they are taxable to

the employee.

Common Provisions of the Tax Credit and Employer Exclusion14

Eligible Children. An eligible child is an individual who has not attained age 18 or who

is physically or mentally incapable of caring for himself or herself. An eligible child may not be

the child of the taxpayer’s spouse.

Qualified expenses. Qualified adoption expenses are reasonable and necessary adoption

fees, court costs, attorneys' fees, and other expenses that are directly related to, and the principal

purpose of which is for, the legal adoption of an eligible child.15 All reasonable and necessary

expenses required by a State as a condition of adoption are qualified adoption expenses.16 For

example, expenses may include the cost of construction, renovations, alterations or purchases

specifically required by the State to meet the needs of the child. Eligible expenses do not include

expenses (1) for which a deduction or credit is allowed under any other provision of the Internal

Revenue Code, (2) to the extent the funds for the expenses are received under any Federal, State,

or local program, (3) incurred in violation of State or Federal law, (4) incurred in carrying out

any surrogate parenting arrangement, (5) incurred in connection with the adoption of a child of

the taxpayer's spouse, or (6) that are reimbursed under an employer adoption assistance program

(for purposes of the tax credit) or other payment or reimbursement program. In addition,

expenses paid or reimbursements received prior to January 1, 1997 are not eligible for the

exclusion for employer benefits or the tax credit. The denial of a double benefit for the same

expenditure does not prevent the taxpayer from obtaining benefits under different tax or

expenditure programs for different qualified adoption expenses.

Adoption of a child with special needs. The higher expense limits in connection with

the adoption of a child with special needs are available only when a State has made a

determination that the adoptee is a child with special needs. The higher $6,000 expense limit for

 

13 Excess employer adoption payments and all employer adoption payments made under plans

which are not non-discriminatory are not eligible for the exclusion of employer-paid or employerreimbursed benefits, nor are they qualified expenses for purposes of the tax credit.

14 See Notice 97-9, 1997-2 C.B. 365.

15 In Notice 97-9, the IRS amplified the list of qualified adoption expenses to include “traveling

expenses (including amounts expended for meals and lodging).” See 1997-2 C.B. 365, 366, at Part I, C.

16 The statutory definition of qualified adoption expenses may be narrower than the adoptionrelated expenses paid by some families seeking to adopt, especially for adoptions of children with special

needs. The legislative history states that all reasonable and necessary expenses required by a State as a

condition of adoption are qualified adoption expenses. However, adoption agency personnel have

indicated to the IRS that States do not require adopting parents to make such expenditures.
11

a child with special needs is not applicable for adoptions of foreign children with special needs.

For purposes of eligibility for the $6,000 expense limit, a child with special needs is a child who

the State has determined: (1) cannot or should not be returned to the home of the birth parents,

and (2) has a specific factor or condition because of which it is reasonable to conclude that the

child cannot be placed with adoptive parents without adoption assistance. Examples of such

factors or conditions are the child's ethnic background, age, membership in a minority group,

being one of a group of siblings awaiting adoption together, medical condition, or physical,

mental, or emotional handicap.

Income limits and phaseouts. For purposes of calculating the income phaseout for the

tax credit and the employer exclusion, modified AGI is computed by increasing the taxpayer's

AGI by the amount otherwise excluded from gross income under Internal Revenue Code sections

911, 931, or 933 (relating to the exclusion of income of U.S. citizens or residents living abroad;

residents of Guam, American Samoa, and the Northern Mariana Islands, and residents of Puerto

Rico, respectively). In addition, for purposes of the exclusion for employer adoption benefits,

modified AGI is determined without applying the exclusion for such benefits.

Timing of tax benefits. The year in which a taxpayer’s qualified adoption expenses are

considered for the tax credit and the year in which employer payments or reimbursements are

excluded from the employee’s income depends on the year in which the adoption becomes

finalized and whether the expenses are for the adoption of a non-foreign or a foreign child.

Adoption of a non-foreign child. A non-foreign child is one who is a citizen or resident

of the United Sates at the time the adoption effort is commenced. The credit for qualified

adoption expenses paid or incurred (including such amounts paid or incurred in an unsuccessful

effort to adopt such a child) is generally allowed in the next taxable year. However, the credit for

expenses paid or incurred in or after the taxable year an adoption becomes final is allowed in the

year that they are paid or incurred. Employer payments or reimbursements are excluded from the

employee’s income in the year in which the payments or reimbursements are made.

Adoption of a foreign child. Special rules apply for the adoption of an eligible child who

is not a citizen or resident of the United States at the time the adoption effort commenced.

Qualified adoption expenses for the purposes of the tax credit and employer payments or

reimbursements are treated as if they are paid in the year in which the adoption becomes final.

Thus, employer payments or reimbursements made in a prior year are taxable income to the

employee in the year in which made, but then are deducted from the employee’s income in the

year in which the adoption becomes final. For expenses paid or incurred after the taxable year an

adoption becomes final, a tax credit or exclusion from income is allowed in the year in which the

payments or reimbursements are made.

Expiration of adoption tax benefits. The adoption tax credit for expenses incurred in

connection with the adoption of a child with special needs is permanent. The adoption tax credit

with respect to the adoption of children other than children with special needs and the exclusion

for employer-paid or employer-reimbursed adoption expenses expire at the end of tax year 2001.

13

Chapter III

BACKGROUND ON ADOPTION

DATA ON THE NUMBER OF ADOPTIONS

Primary data on adoptions come from State court systems, bureaus of vital statistics, and

social service agencies. Although there have been sporadic efforts to collect data over the past

fifty years, complete data on the number of adoptions currently are available only for adoptions

of foreign children and children for whom a State welfare agency has responsibility. The most

comprehensive effort to collect adoption statistics was conducted by Victor and Carol Flango of

the National Center for State Courts, who estimated there were a total of 127,000 children

adopted in 1992.1

 Their estimate, however, slightly understates the total number of adoptions

because it does not include foreign adoptions in States that do not use the State courts to report

adoptions.

Adoptions of foreign children. Data on the number of adoptions of foreign children are

available both from the Immigration and Naturalization Service and the State Department.

Adoptions of foreign children have been increasing, even prior to the enactment of tax benefits

for adoption. There were 6,500 adoptions of foreign children in 1992, 9,700 in 1995, 13,620 in

1997, 15,800 in 1998, and 16,400 in 1999 according to data reported by the Evan B. Donaldson

Adoption Institute.2

Adoptions with public agency involvement. Section 479 of the Social Security Act

requires States to report adoptions from foster care. To implement this requirement, the U.S.

Department of Health and Human Services has set up the Adoption and Foster Care Analysis and

Reporting System (AFCARS). Although the only involvement with a public agency of some of

these children occurs during the process of determining that the child has special needs, the term

“children adopted from the public foster care system” is used in the AFCARS reports. That term

will be used here.

The number of children estimated to be adopted from the public foster care system has

increased substantially in recent years, from 19,000 in 1992 to 26,000 in 1995 and to 36,000 in

 

1

 Flango, Victor and Flango, Carol, “How Many Children Were Adopted in 1992,” Child Welfare,

Vol. LXXIV #5, September/October 1995, pp. 1018-1031.

2

 These data generally represent visas issued by the United States Department of State for children

adopted in foreign countries and children to be brought to the United States and adopted here in the fiscal

year. These data are frequently used to represent the number of adoptions of foreign children. However,

not all visas are used in the year of issue and some visas may never be used. As reported in the Adoption

Factbook III, Immigration and Naturalization Service (INS) figures are somewhat lower (the difference

is only 24 in 1996 but about 1,000 in 1997, the most recent year for which INS figures are available).

The Evan B. Donaldson Adoption Institute web site, http://www.adoptioninstitute.org/. Accessed

September 22, 2000.
14

1998.3, 4 Administrative factors including increased emphasis on moving children to permanent

placement and recruitment of potential adoptive parents have played a role in these increases.5

Children with special needs. Most children adopted from the public foster care system

are children with special needs. Children with special needs are those who because of age, race,

disability, or other characteristics would be unlikely to find a permanent home without special

assistance. Determinations of special needs status are made by State child welfare agencies

based on their own State’s standards. Federal and State matching funds are available to pay nonrecurring costs directly related to the legal costs of adoption for all children with special needs

(up to a maximum of $2,000).6

 Funds for on-going, post-adoption care are available for all

children with special needs eligible for Federal assistance under Title IV-E (the majority of all

children with special needs) and for children funded through State-only programs. Children in

the public foster care system not determined to have special needs are not eligible for Federal

funding for continuing support or for non-recurring adoption cost reimbursement.7

 Of the 36,000

children adopted in fiscal 1998 with public agency involvement, 31,000 received a continuing

special needs adoption subsidy.8

 A few additional children for whom reimbursements may have

been received for only non-recurring adoption costs are not included in the 31,000. Therefore,

31,000 represents the minimum number of children adopted in fiscal year 1998 who were

determined to have special needs.

A description of Federal expenditure programs for adoptions is included in Appendix B at

the end of this report.

Stepparent adoptions. Adoptions by stepparents accounted for an estimated 42 percent,

or 53,000, of 1992 adoptions.9 Adoptions by stepparents are not eligible for the Federal adoption

tax credit or employer exclusion.

 

3

 Penelope L. Maza, “Recent Data on the Number of Adoptions of Foster Children,” Adoption

Quarterly , Vol. 3(2) 1999, pp. 71-81. Estimates for 1992 and 1995 are the figures reported as “FY

1995 Adoption Incentive Program Baselines,” on p.76. The 1998 total was reported in the U.S.

Department of Health and Human Services, The AFCARS Report, Interim Estimates for Fiscal Year

1998—April 2000 (3). Improvements in reporting make precise comparisons over time uncertain.

4

 The Department of Human Services recently reported that adoptions with a public agency

involvement increased to 46,000 in fiscal year 1999.

5

 National Adoption Information Clearinghouse citing Adoptalk, Winter 1999 (publication of the

North American Council on Adoptable Children).

6

 States may set a lower limit on reimbursable non-recurring expenses.

7

 A description of Title IV-E is included in Appendix B, Federal Expenditure Programs for

Adoption.

8

 United States Department of Health and Human Services, Administration for Children and

Families, The AFCARS Report, Interim Estimates for Fiscal Year 1998—April 2000 (3).

9

 The estimated number of stepparent adoptions was computed from the total number of adoptions

and the percentage that are stepparent adoptions as reported for 1992 by Flango and Flango, p. 1018.
15

Adoptions eligible for the tax credit or exclusion of employer reimbursement. Using

the estimate of 130,000 adoptions described in Chapter I and subtracting the estimated 53,000

stepparent adoptions implies that approximately 77,000 adoptions potentially would be eligible

for a tax credit or exclusion. However, some of these adoptions would not be eligible because

the income level of the adoptive parents is above the maximum for the credit or exclusion.

Further, for many adoptions of children with special needs, adoptive parents appear not to have

any unreimbursed qualified expenses.

FAMILIES SEEKING TO ADOPT A CHILD

At least since the mid-1950s, the number of parents seeking to adopt healthy non-foreign

infants has exceeded the number of such infants available for adoption, as evidenced by long

waiting lists.10 According to data reported in the 1988 and the 1995 National Surveys of Family

Growth (NSFG), the number of ever-married women age 18-44 seeking to adopt who have also

taken steps to adopt has remained approximately constant in recent years: 204,000 in 1988; and

232,000 in 1995. Due to the relatively low frequency of adoption seeking in the total population,

the difference is not statistically significant.11 Because success in the adoption of healthy nonforeign infants is relatively low, there may be additional, discouraged families who would take

steps to adopt if the chances of success seemed higher or the financial and other costs were

lower.12 The number of families seeking to adopt is further understated since the NSFGs have

not surveyed men or never-married women regarding the desire for adoption.

Data from the NSFGs indicate that ever-married women seeking to adopt prefer children

of their own race, female gender, under age two, and without disabilities.13 According to the

Adoption Factbook III, 23,500 children under age two were adopted in 1996.14

While preferring infants, the majority of women (in the NSFG) currently seeking to adopt

express a willingness to accept older children and children of a different gender, race, or with a

 

10 The Future of Children, Published by the Center for the Future of Children, The David and

Lucille Packard Foundation, Spring 1993, p. 23.

11 A. Chandra et al, Center for Disease Control and Prevention, Advance Data No. 306 , Adoption,

Adoption Seeking, and Relinquishment for Adoption in the United States, May 11, 1999, p. 7.

12 It is not possible to estimate success in adoption for all persons seeking adoption from the

published data in the Advance Data report cited above. In the 1988 and 1995 NSFG, 31 percent of the

women who had ever “sought to adopt” or “took steps to adopt” reported actually adopting a child,

Advance Data No. 306). p. 10. This estimate of adoption success includes only success for ever-married

women. Furthermore, since it includes women who sought to adopt stepchildren and other related

children, the estimate may not be entirely representative of the success ratio of ever-married women who

have sought to adopt unrelated children.

13 Op.cit., p. 8.

14 National Council for Adoption, Adoption Factbook III, 1999.
16

disability. Among children adopted from the public foster care system, 53 percent were age six

or older.15

CHILDREN AVAILABLE FOR ADOPTION

Relinquishment of children at birth. Historically, children of young unwed mothers

were the most important source of adoptive infant children for adoptive parents. In a 1982

survey, 88 percent of infants placed for adoption were born to never-married mothers, 6 percent

of placements were by previously married women, and the remaining 6 percent were by currently

married women.16

Based on data reported in various NSFGs, Anjani Chandra et al estimated that the

percentage of children of never-married white mothers relinquished for adoption dropped from

19.3 percent in the 1950s to 7.5 percent in 1973 and to 1.7 percent in the 1989-95 period.17

Although the number of never-married white women giving birth has increased from 175,000 in

197018 to 825,000 in 1998,19 the decline in relinquishment rates sharply reduced the potential

number of infants available for adoption. Relinquishment rates among never-married black

mothers have apparently been low for decades; the rate was under 2 percent before 1973.20

Children available in the public foster care system. A major source of adoptive

children currently is the foster care system. As of March 31, 1999, 560,000 children were in

foster care. Of these, 122,000 were waiting to be adopted. Children waiting to be adopted are

defined in the AFCARS system as children whose goal is adoption and/or children of parents

whose parental rights have been terminated.21

The number of waiting children who would qualify as children with special needs is

unknown. Most likely many of the waiting children in foster care would qualify as children with

special needs. For example, 54 percent of the waiting children on March 31, 1998, had been in

continuous foster care for three years or more.22

 

15 The AFCARS Report, Interim Estimates for Fiscal Year 1998—April 2000 (3).

16 Packard, p. 34.

17 A. Chandra et al, Center for Disease Control and Prevention, Advance Data No. 306 , Adoption,

Adoption Seeking, and Relinquishment for Adoption in the United States, May 11, 1999, p. 9.

18 United States Department of Commerce, 1995 Statistical Abstract, p. 77.

19 United States National Center for Health Statistics, National Vital Statistics Report, Vol.48, No.3

March 28, 2000, p. 44.

20 Op.cit., p. 9.

21 Communication September 22, 2000 from the United States Department of Health and Human

Services. Children age 16 and over whose goal is emancipation are excluded from the 122,000 available

children.

22 U.S. Department of Health and Human Services, The AFCARS Report, Interim Estimates for

Fiscal Year 1998—April 2000 (3), p. 4.
17

 Foreign children. Several additional sources of children available for adoption have

arisen since the mid-1950s. Children orphaned in the Korean War began to be adopted by

families in the United States beginning in the 1950s. Latin America, China, and the countries of

the former Soviet Union have been important countries of origin at one time or another in the

1990s.23 The number of these children available for adoption by U.S. families and, to a certain

extent, the cost of the adoptions, is determined by the conditions and policies in the countries of

origin.

COSTS OF ADOPTION

 Out-of-pocket costs of adoption vary widely. According to estimates provided by the

National Adoption Clearinghouse (Clearinghouse) at its web site, costs for a non-foreign public

agency adoption, including travel costs, range from zero to $2,500.24 The Clearinghouse reports

that children placed by public agencies usually have been determined by the State to have special

needs, and adoption expenses up to a set limit (not to exceed $2,000) for these children are

eligible for reimbursement. Hence, unreimbursed adoption expenses for these children often are

very low. That may account for the fact that only about 4,600 adoptions of children with special

needs claimed tax benefits for 1998.25

The Clearinghouse reports that domestic private agency fees range from $4,000 to

$30,000 and more, and that some agencies provide sliding fees based on family income.

Expenses for independent (without an agency) non-foreign adoptions are reported to range from

$8,000 to $30,000 and more. One of the reasons that independent adoption might cost more than

an adoption through a private agency is that independent adoptions may require advertising for

birth parents at a cost of as much as $5,000. Expenses for non-foreign private and independent

adoptions can include substantial medical and living expenses and legal costs. International

adoption costs are reported at $10,000 to $30,000 and more.

The Clearinghouse report also provides ranges of costs for specific types of expenses but

does not include estimates of average cost or other cost information that would provide a basis

for determining the number of adoptions that exceed the limits for adoption tax benefits. For

adoptions at the lower end of the cost ranges for non-special needs adoptions, the tax benefits

will substantially reduce the after-tax cost of adoption. In the relatively few cases where the

adoption costs of children with special needs exceed reimbursements through Federal and State

programs, the adoption credit usually seems sufficient to cover remaining qualified expenses.

 

23 Adoption Factbook III, pp. 44-45.

24 No reference year or data source for the cost data cited above is provided by the National

Adoption Information Clearinghouse web site, http://www.calib.com/naic/. Accessed June 6 2000.

25 Taxpayers adopting children with special needs and having unreimbursed expenses below $5,000

do not have a financial incentive to check the special needs box, and some may not. In other cases, the

special needs box may have been checked incorrectly. For example, in both 1997 and 1998 about 300

taxpayers report adoptions as being both special needs and foreign on Form 8839 despite instructions on

the form explaining that a child with special needs must be a citizen or resident of the United States or its

possessions at the time the adoption process began.

19

Chapter IV

USE OF ADOPTION TAX BENEFITS FOR 1997 AND 1998

This chapter presents data from tax returns about the utilization of the two Federal

income tax benefits for adoption in the first two years that they were available to taxpayers, 1997

and 1998. The data are classified by income, marital status, and the type of adoption.

The first section of this chapter presents highlights about the use of the tax benefits at

various income levels. The second section describes the detailed tables that appear at the end of

the chapter and explains the concepts used in the tables and the limitations of the data. The

primary limitation is that tax information generally is presented as it was reported by taxpayers

on their original tax returns, and does not reflect amended returns or administrative actions by the

Internal Revenue Service. There are separate detailed tables for 1997 and for 1998.

HIGHLIGHTS OF FEDERAL INCOME TAX BENEFITS FOR ADOPTION, 1997 AND

1998

The basic facts about aggregate use of adoption tax benefits in 1998 were presented in

Chapter I. For the convenience of the reader, summary information on 1997 and 1998 is

consolidated in Table 4-1. Summary data are presented for the two tax benefits combined and

separately, for all adoptions as well as separately for adoptions of non-foreign non-special needs

children, children with special needs, and foreign children. The statistics in Table 4-1 have been

calculated from the detailed tables included at the end of the chapter.

 Generally the patterns of adoptions by type, income class and expense and tax benefits

earned are similar in 1997 and 1998 but the number of returns, the number of adoptions and the

amounts of tax benefits are larger in 1998 due in part to the fact that returns for 1997 include

only adoptions finalized in 1997 for which expenses were paid in 1997. 1998 returns include

adoptions finalized in 1997 for which expenses were paid in 1998, adoptions finalized in 1998

for which expenses were paid in 1997 or 1998, and 1997 expenses of adoptions of non-foreign

children which were still in process at the end of 1998. In 1997, 36,661 taxpayers reported a tax

benefit from the tax credit or employer exclusion. In 1998, the comparable figure is 45,349.1

 

1

 As discussed below, some 1998 returns include only carryover of 1997 credit.
Table 4 - 1

Summary of the Use of Tax Benefits for Adoptions, 1997 and 1998

All Adoptions Children with Foreign Children 

Special Needs (domestic) 

1997 1998 Change 1997 1998 Change 1997 1998 Change 

(%) (%) (%) 

Tax Credit and Employer Exclusion Combined

1

Number of Returns 36,661 45,349 24 3,194 3,915 23 10,438 12,705 22 

Number of Adoptions 40,755 50,353 24 3,895 4,721 21 11,632 14,264 23 

Average Qualified Expenses Per Return 6,227 6,540 5 3,917 4,271 9 10,897 14,264 31 

Average Qualified Expenses Per Adoption 5,601 5,890 5 3,212 3,542 10 9,779 14,264 46 

Percentage of Returns with Expenses Under $5,000 54 51 70 66 24 23 

Percentage of Returns with Expenses Under $6,000 64 64 75 71 35 37 

Percentage of Returns with Expenses Over $10,000 23 25 10 12 51 52 

Combined Tax Benefits in Year ($ in millions) 70.4 101.5 44 4.8 7.1 48 24.8 38.0 53 

Tax Credit for Adoption

Number of Returns

 2

36,375 44,718 23 3,171 3,857 22 10,382 12,561 21 

Number of Adoptions

 2

40,440 49,644 23 3,865 4,653 20 11,569 14,094 22 

Average Qualified Expenses Per Return 6,058 6,411 6 3,719 4,107 10 10,729 10,980 2 

Average Qualified Expenses Per Adoption 5,449 5,775 6 3,051 3,404 12 9,628 9,785 2 

Percentage of Adoptions with Expenses Under $5,000 57 54 76 72 25 24 

Percentage of Adoptions with Expenses Under $6,000 68 68 80 76 38 42 

Percentage of Adoptions with Expenses Over $10,000 20 21 7 8 45 47 

Tax Credit for In-year Expenses ($ in millions) 99.1 133.5 35 7.4 10.6 43 38.0 49.9 31 

Tax Credit Taken in Year ($ in millions)

2

69.1 99.9 45 4.7 7.0 49 24.4 37.5 54 

Employer Adoption Benefits

1

Number of Returns 2,937 3,892 33 291 369 27 785 1,073 37 

Number of Adoptions 3,270 4,309 32 350 427 22 886 1,206 36 

Average Total Reimbursements Per Return 2,700 2,779 3 2,471 2,463 (0) 2,998 3182 6 

Average Total Reimbursements Per Adoption 2,425 2,510 4 2,054 2,128 4 2,656 2831 7 

Percentage of Returns with Reimbursements Under $5,000 87 86 90 92 82 80 

Percentage of Returns with Reimbursements Under $6,000 95 96 95 97 94 94 

Percentage of Returns with Reimbursements Over $10,000 1 1 1 0 1 2 

Tax Benefits for Employer Adoption Benefits ($ in millions) 1.3 1.7 31 0.1 0.1 0 0.4 0.6 50 

Taxpayers Using Both Benefits

1

Number of Returns 2,651 3,261 23 268 311 16 729 929 27 

Number of Adoptions 2,955 3,600 22 320 359 12 823 1,036 26 

Average Qualified Expenses Per Return 8,840 9,822 11 5,914 6,859 16 14,974 15,968 7 

Average Qualified Expenses Per Adoption 7,931 8,897 12 4,953 5,942 20 13,263 14,319 8 

Percentage of Returns with Expenses Under $5,000 40 37 58 52 12 9 

Percentage of Returns with Expenses Under $6,000 47 43 66 59 14 10 

Percentage of Returns with Expenses Over $10,000 33 38 14 22 71 76 

Combined Tax Benefits in Year ($ in millions) 6.4 9.0 41 0.5 0.7 40 2.3 3.5 52 

US Treasury Department 

 Office of Tax Analysis

1 Does not include returns with only taxable employer benefits.

2 

For 1998, the amounts shown do not include returns or the tax credit for those returns with only 1997 carry forwards. Including these carry forwards leads to credit amo

 and 57.9 for All Adoptions, Children with Special Needs, Foreign Children, and Non-Foreign, Non-Special Needs Children, respectively. See the "Credit Taken in 199
21

Adoption Expenses and Benefits by Income

As noted in Chapter III, non-tax data show a wide variation in adoption expenses between

and within adoption types. The tax return data also show considerable variation in adoption

expenses between and within adoption types. Furthermore, the tax data show that average

adoption expenses consistently rise with income, although there is considerable diversity in

adoption expenses within each income class. These relationships can be illustrated by the tax

credit for 1997.

As shown in Table 4-2, the average qualified expense per adoption for returns claiming

an adoption tax credit in 1997 rises with income for all types of adoptions, although the relative

change is largest for adoptions of non-foreign non-special needs children. For that type of

adoption, the average reported expense for the $100,000 and over income class is over two and

one-half times as large as for the under $25,000 income class ($6,351 versus $2,496). For

adoptions of children with special needs, both the percentage and dollar variations are lower,

$5,012 versus $2,252, or about a 125 percent difference. For adoptions of foreign children, the

overall level of expenses is much higher, but there is less variation in average expense. There is

only a 27 percent difference between the lowest and the highest income classes.

Within each income class, adoption type group, there is considerable variation in reported

expenses. For example, although 31 percent of taxpayers with adjusted gross incomes between

$50,000 and $75,000 reported expenses under $1,000 for the adoption of a non-foreign nonspecial needs child, another 23 percent had expenses of more than $6,000, including 11 percent

whose spending exceeded $10,000 (see Table 4-3). Although average expenses rise with income

for adoptions of foreign children, reported expenses were typically over $5,000 at all income

levels.

The combination of increasing average qualified expenses and the phaseout of tax

benefits as income increases means that the average tax benefit from the adoption tax credit

increases and then decreases with income. Table 4-2 shows, for example, that for non-foreign

non-special needs adoptions the average tax credit is $1,626 per adoption for taxpayers with

AGIs below $25,000, $2,607 for taxpayers with AGIs between $50,000 and $75,000, and $702

for taxpayers with AGIs of $100,000 and over.

The credit that can be used is limited to tax liability, although unused credit can be carried

forward. The last column of Table 4-2 shows the percentage of the tax credit that each group

was able to use to offset 1997 tax liability. The remainder of the credit was carried forward for

use against tax liability in tax years 1998 through 2002. The percentage of the tax credit that

could be used in 1997 varied much more by income level than by the type of adoption. On

average, despite their lower average adoption expenses and credits generated by those expenses,

adopting families with incomes under $25,000 were able to use only a small portion of their tax

credits in 1997 (12 percent to 23 percent, depending on the type of adoption).
Table 4 - 2

Adoption Tax Credit, 1997:

Average Qualified Expenses, Tax Credit, and Carryforward per Adoption

Number of Average Average Tax Benefits ($) Benefits

Adoptions Qualified Per Adoption Used

Expenses Total Used Carried in 1997

($) in 1997 Forward (%)

Non-Foreign, Non-Special Needs Adoptions

Total 25,006 $3,886 $2,145 $1,602 $543 70%

By Adjusted Gross Income

Under $15,000 

$ 15,000 - $ 24,999 

$ 25,000 - $ 49,999 8,712 2,873 2,006 1,472 534 67

$ 50,000 - $ 74,999 8,383 4,197 2,607 2,124 483 75

$ 75,000 - $ 99,999 4,171 5,508 2,242 1,850 392 78

$100,000 and over 1,206 6,351 702 642 60 89

By Filing Status

Married Filing Jointly 22,800 3,955 2,164 1,641 523 71

Other 2,206 3,175 1,955 1,208 747 57

Children with Special Needs (domestic)

Total 3,865 $3,051 $1,928 $1,205 $722 63%

By Adjusted Gross Income

Under $15,000 

$ 15,000 - $ 24,999 

$ 25,000 - $ 49,999 1,533 2,564 1,829 1,144 685 63

$ 50,000 - $ 74,999 1,231 3,414 2,298 1,625 673 71

$ 75,000 - $ 99,999 514 3,934 1,907 1,342 565 70

$100,000 and over 114 5,012 751 607 144 81

By Filing Status

Married Filing Jointly 3,330 3,111 1,935 1,237 698 64

Other 535 2,677 1,882 1,005 877 53

Foreign Children1

Total 11,569 $9,628 $3,287 $2,105 $1,182 64%

By Adjusted Gross Income

Under $15,000 

$ 15,000 - $ 24,999 

$ 25,000 - $ 49,999 2,910 8,521 3,632 2,133 1,499 59

$ 50,000 - $ 74,999 4,307 9,561 3,786 2,550 1,236 67

$ 75,000 - $ 99,999 2,880 10,675 2,911 2,144 768 74

$100,000 and over 943 10,799 920 802 118 87

By Filing Status

Married Filing Jointly 9,767 9,626 3,210 2,119 1,091 66

Other 1,802 9,643 3,704 2,031 1,673 55

U.S. Treasury Department September, 2000

 Office of Tax Analysis

Footnotes follow Table 98-8, at the end of this chapter.

2,534 2,496 1,626 375 1,250 23

473 2,252 1,590 305 1,285 19

529 8,487 3,594 448 3,146 12
Table 4 - 3

Adoption Tax Credit, 1997:

Percentage of Adoptions with Selected Levels of Qualified Adoption Expenses

Number Percentage of Adoptions

of With Qualified Expenses per Adoption

Adoptions11 Less Than $5,000 $6,000 $10,000

$1,000 And Over And Over And Over

Non-Foreign, Non-Special Needs Adoptions

Total 24,664 34% 31% 20% 10%

By Adjusted Gross Income

Under $15,000 

$ 15,000 - $ 24,999 

$ 25,000 - $ 49,999 8,576 41 22 13 5

$ 50,000 - $ 74,999 8,235 31 35 23 11

$ 75,000 - $ 99,999 4,155 24 45 32 17

$100,000 and over 1,206 21 50 37 21

By Filing Status

Married Filing Jointly 22,498 34 32 21 10

Other 2,166 35 23 14 7

Children with Special Needs (domestic)

Total 3,709 44% 24% 20% 7%

By Adjusted Gross Income

Under $15,000 

$ 15,000 - $ 24,999 

$ 25,000 - $ 49,999 1,461 50 19 16 5

$ 50,000 - $ 74,999 1,185 41 28 24 8

$ 75,000 - $ 99,999 502 36 32 28 10

$100,000 and over 114 30 42 37 12

By Filing Status

Married Filing Jointly 3,206 45 25 21 7

Other 503 42 21 17 5

Foreign Children1

Total 11,425 14% 75% 62% 45%

By Adjusted Gross Income

Under $15,000 

$ 15,000 - $ 24,999 

$ 25,000 - $ 49,999 2,878 16 69 56 38

$ 50,000 - $ 74,999 4,213 14 75 63 45

$ 75,000 - $ 99,999 2,870 12 79 68 52

$100,000 and over 941 12 79 67 51

By Filing Status

Married Filing Jointly 9,635 14 74 62 46

Other 1,790 12 79 65 43

U.S. Treasury Department September, 2000

 Office of Tax Analysis

Footnotes follow Table 98-8, at the end of this chapter.

4

4

2,492 46 20 9

447 50 19 14

523 14 68 54 37
24

Families with moderate incomes and whose incomes were lower than usual in 1997, perhaps

because one or both spouses took time away from work to attend to the details of adoption or to

provide care for the newly adopted child, may be expected to have higher tax liability in future

years which may be sufficient to permit the family to obtain most or all of the financial benefit of

the tax credit during the five-year carryover period. However, low- and moderate-income

families that do not expect to have substantially greater tax liability in future years may not be

able to fully utilize the benefits of their tax credits during the carryover period. In both

situations, the families do not have the immediate benefit from the tax credit to pay for the costs

of the adoption as they are incurred. Even in the highest income class for which the adoption tax

credit is available, not all of the adoption tax credits generated in 1997 could be used in 1997.1

Depending on the type of adoption, 81 percent to 89 percent of tax credits were used in 1997.

Adoptions by Type of Adoption, Income, and Marital Status

The income levels of taxpayers reporting the different types of adoptions varied

somewhat. For example, in 1997 only 30 percent of the taxpayers claiming a credit for adoptions

of foreign children reported AGI of less than $50,000, whereas for adoptions of non-foreign nonspecial needs children, the comparable figure is 44 percent (calculated from Table 97-1). About

8 percent of taxpayers reporting adoptions of foreign children had AGIs of $100,000 or above

versus 5 percent of taxpayers reporting non-foreign non-special needs adoptions.2

Taxpayers claiming the adoption credit have somewhat higher incomes than all families

with young children. Among taxpayers filing joint returns with children under age 6 and

adjusted gross incomes (AGIs) below $115,000, 38 percent reported AGIs above $50,000, and 12

percent had AGIs between $75,000 and $115,000.3

 In contrast, 59 percent of taxpayers claiming

an adoption credit had AGIs above $50,000, and 25 percent had AGIs between $75,000 and

$115,000.

Overall 89 percent of adopting taxpayers were married and filed a joint return. Taxpayers

reporting adoptions of children with special needs or adoptions of foreign children were more

likely than other adoptive parents to be unmarried.

Use of Adoption Benefits in Two Successive Years

Because adoptions are initiated at various times during a calendar year and expenses may

be incurred throughout the adoption process (and even after an adoption has been finalized), the

adoption expenses reported for a single calendar year may not represent the total qualified

expenses for the adoption. While data reported for a single tax year do provide reasonable

 

1

 Adoption tax benefits are not available to taxpayers with modified adjust gross incomes of

$115,000 or more.

2

 Since the adoption tax credit is not available to taxpayers with modified AGIs over $115,000, the

number of adoptions by families with incomes above that level cannot be determined from tax data.

3

 Computations by the Department of the Treasury, Office of Tax Analysis from unpublished data.
25

information about the budgetary costs of providing adoption benefits and the aggregate amounts

of qualified adoption expenses incurred by taxpayers, for some adoptions a single year’s data

may not provide complete information about qualified expenses incurred and the tax benefits

received. Much of that information should be obtainable by combining the tax return

information about an adoption for every year in which adoption benefits for that child were

reported. In practice, however, the information obtainable from linking tax return data as

reported by taxpayers for 1997 and 1998 is quite limited.

Additional tax benefits were reported in 1998 for at least 5,700 adoptions, or 14 percent,

of the 40,755 adoptions for which some tax benefit was reported in 1997. Benefits may have

been claimed in 1998 for some additional adoptions, although omitted identifying information

precludes an exact tally. Similarly, additional qualified expenses for the tax credit were reported

in 1998 for 14 percent of the adoptions for which the adoption tax credit was reported in 1997.

Only 5 percent of the tax returns reporting employer reimbursements in 1997 also reported

employer reimbursements for the same adoption in 1998. Review of the data for adoptions for

which benefits were reported in both years showed that at least 20 percent had important

inconsistencies. These discrepancies may be from errors in data processing or due to taxpayer

reporting errors, and may have been resolved subsequently. Nevertheless, because of the

inconsistent data, tables showing combined 1997 and 1998 qualified adoption expenses and tax

benefits have not been developed.

DETAILED TAX RETURN DATA, 1997 AND 1998

This section describes the detailed tables that appear at the end of this chapter, and the

sources and limitations of the data. The table numbers indicate the year from which the data

were derived. For example, Table 97-1 contains data for 1997, and Table 98-1 contains similar

information for 1998.

Tax Return Data for 1997

There are eight tables of detailed data from 1997 income tax returns. Tables 97-1 and 97-

2 show combined information about the adoption tax credit and the exclusion for employer-paid

or -reimbursed adoption expenses. Qualified adoption expenses include all amounts reported for

the credit (including those amounts in excess of the maximum credit) plus the total amount of

employer reimbursements, both taxable and non-taxable. However, tax returns with employer

reimbursements are not included if the entire reimbursement was taxable due to a full income

related phaseout of the tax exclusion.

As in all of the detailed tables, the information is shown by type of adoption: for all

adoptions; for adoptions of children with special needs; and for foreign adoptions. Any adoption

which was reported by the taxpayer as being both “a foreign child” and “a child with special

needs” has been included under the foreign child adoption category, since adoptions of foreign

children are not eligible for the higher levels of maximum benefits available for adoptions of

children with special needs. Information about adoptions of non-foreign non-special needs
26

children is not presented separately, but can be obtained by subtraction.4 Within each type of

adoption, data are presented by adjusted gross income class and by marital status.

Table 97-1 shows the number of adoptions for which tax benefits were reported, amount

of qualified adoption expenses reported, and total adoption tax benefits used in 1997 or carried

forward for use in later years. Table 97-2 categorizes the family’s combined qualified adoption

expenses reported for the tax credit and employer reimbursements by the size of the total

reported expenses per return. The tax return records used for this analysis only provide the

amount of employer reimbursements on a per return basis. Therefore, distributions of expenses

combining the credit and the exclusion cannot be shown on a per adoption basis.

Tables 97-3 and 97-4 contain information about tax returns claiming the adoption tax

credit. Table 97-3 shows the number of adoptions and the amounts of qualified adoption

expenses and the amount of adoption tax credit generated by those adoption expenses. Qualified

expenses are the amounts reported by taxpayers and are not limited to amounts for which the tax

credit is available. Table 97-4 reports the distribution of qualified expenses per adoption by size

of expenses.

Tables 97-5 and 97-6 present information about employer payments or reimbursements

for employees’ adoption costs. The tables do not include data for employer reimbursements if

the entire reimbursement was taxable due to a full income related phaseout of the exclusion.

Employee tax benefits have been estimated by multiplying the non-taxable employer benefits by

the appropriate marginal tax rate or rates applicable to the employee’s filing status and taxable

income (as adjusted for excluded adoption benefits). Depending on the employee’s taxable

income, more than one tax rate might apply. For lower-income employees, the applicable tax

rate for some or all of the excluded benefits might be zero. The tax effects of interactions from

changes in the worker’s taxable income with other tax provisions (such as “floors” on itemized

deductions) have not been included. Table 97-6 shows the distribution of qualified adoption

reimbursements reported on each tax return by the size of benefits.

Tables 97-7 and 97-8 are similar to Tables 97-1 and 97-2 but only include information

about families that used both the tax credit and the employer exclusion.

Tax Return Data for 1998

Tables 98-1 through 98-8 for 1998 are similar to the 1997 tables described above.

However, Table 98-3 reflects the fact that some of the adoption tax credit used in 1998 represents

unused credits carried forward from 1997. Also, the credits carried forward from 1998 to 1999

include tax credits that were generated by qualified expenses in 1997. In addition, Tables 98-1

and 98-7 do not include taxpayers with carryovers from 1997 but without any qualified expenses

in 1998.

 

4

 Information about adoptions of non-foreign non-special needs adoptions can be obtained by

subtracting the entries under adoptions of special needs children and adoptions of foreign children from

the comparable entry for all adoptions.
27

There are some inconsistencies between the carryforwards shown in the 1997 data (Table

97-3) and the carryforwards shown in the 1998 data as having been carried forward from 1997

(Table 98-3). Table 98-3 shows that adoption tax credits of $24.3 million were carried forward

from 1997 to 1998 on 11,257 tax returns. However, Table 97-3 shows that $30.0 million of

unused tax credits were carried forward from 1997 on 14,923 tax returns. Thus, it appears that

nearly 3,700 taxpayers did not report about $5.7 million of tax credits that, based on 1997

returns, were carried forward from 1997. Given that some of the carryovers from 1997 that were

reported on 1998 tax returns may have originated on amended tax returns for 1997 (which are not

included in the data used for this report), the amount of unclaimed carry forwards may be even

larger. The apparent failure to claim 1997 credits carried forward may have several explanations.

For example, some taxpayers may not have had sufficient tax liability for 1998 but may use the

tax credits in future years. Some unreported carryforwards of credits from 1997 may have been

reported subsequently on amended 1998 returns.

Data Sources And Limitations

The data presented in this chapter are based on qualified adoption expenses for the tax

credit, employer payments and reimbursements, and the resulting tax benefits, as reported on the

tax returns of taxpayers who used either the tax credit or the employer exclusion, or both, in 1997

and 1998. Generally, the information is as reported by taxpayers, and thus reflects most of the

errors, omissions, and internal inconsistencies, as shown on the tax returns, and does not reflect

administrative actions by the Internal Revenue Service (IRS). However, as explained below,

some adjustments to the tax return data were made for obvious errors. For this report, the IRS

prepared from its administrative files a special data extract for each year containing data from

every tax return in which one or both of the adoption benefits was reported or which included a

Form 8839. The data on these extracts were processed and tabulated by the Office of Tax

Analysis in the Treasury Department.5

Six limitations of the data from these tax returns have implications for interpreting the

material presented in this report.

The data used for this report do not include information from amended tax returns. If a

taxpayer did not claim any adoption tax benefits on his or her tax return as originally filed but

subsequently claimed such benefits on an amended return, the taxpayer is not included in the data

used for this report. Because the adoption benefits were first available for tax year 1997, some

taxpayers might not have been aware of the benefits and, hence, did not claim them on the tax

return as initially filed, but later became aware of the omission and claimed the benefits by filing

an amended return. Hence, it is possible that the tabulated 1997 data would understate use of the

tax benefits for adoption. Comparison of 1997 and 1998 tax return data suggest that there were

some omissions on originally-filed 1997 tax returns. For example, about 3,000 1998 returns

 

5

 The numbers of tax returns reporting tax benefits for adoption shown in this report may differ

slightly from the numbers reported by the Internal Revenue Services in its various publications. The

numbers in this report exclude a small percentage of tax returns with apparently inconsistent information.
28

show carryovers of unused 1997 adoption tax credits even though the originally filed 1997

returns do not report any adoption expenses. However, some of this difference could be

attributable to processing or other errors.

The tax return data upon which this report is based were transcribed for IRS’s

administrative requirements, and certain items were omitted. In many instances, the items that

were not transcribed should be obtainable by arithmetic calculation from the transcribed data.

However, when there are other errors, the lack of some items can lead to uncertainty about the

available information. In other instances, the lack of some items limits the information about the

use of the adoption tax benefits. For example, when an employer provides benefits to a taxpayer

for the adoption of two children in a single year, the amount of the benefits paid for each child

cannot be determined. Similarly, for carryforwards from 1998 to 1999, the year (1997 or 1998)

in which the carryforwards originated was not available from IRS administrative data.

The data have been checked for many types of inconsistencies and errors, but the data

have been adjusted to correct only the most obvious errors. When review of the taxpayer’s

record indicated that the inconsistency was due to simple errors such as misplacing a decimal

point or making an entry one line above or below its proper location, the data were adjusted.

Where the amount of qualified expenses reported on Form 8839, Qualified Adoption Expenses,

was not shown or was inconsistent with the amount of the adoption tax credit as shown on Form

1040, it was assumed that the adoption tax credit on Form 1040 was correct and the amount of

qualified expenses was adjusted. Where remaining discrepancies did not seem to be significant,

the inconsistent record was used. However, the small percentage of tax return records with

significant unresolved discrepancies was omitted from some or all of the tables used in this

report. For example, where the amount of qualified expenses was adjusted, as described above,

and the taxpayer had qualified expenses in the same year for two adoptions, it was not possible to

allocate the expenses between adoptions. In such instances, information about both adoptions

was included in the totals but excluded from the table which distributes adoptions by the size of

the qualified expenses for that adoption (Table 97-4 for 1997 and Table 98-4 for 1998). The

proportion of omitted adoptions or tax returns is so small that it does not have an appreciable

impact on the implications that can be drawn from the data.

The data are from tax returns as filed and do not include the results of any modifications

that have been made, or which may be made in the future, as the result of IRS activities beyond

the initial posting of the tax return data or of IRS examination of the tax return. For example, the

data received from the IRS do not include any changes from corrections of mathematical errors

or inconsistencies that may follow communication with, or submission of missing data or forms

by, the taxpayer, or any data from amended returns filed subsequently by the taxpayer. In

particular, it is not possible to determine the extent to which the adoption-related data might

change following examination, although in a few instances the data seem to indicate results

which do not conform to the adoption tax provisions. For example, the provisions do not permit

adoptions of foreign children with serious medical conditions to receive the higher benefit levels

that are available for special needs adoptions. Nevertheless, in each of the two years several

hundred adoptions were reported to be foreign children with special needs. While some of those

cases may be attributable to errors in transcribing the data on tax returns, some may also be due
29

to errors or misunderstanding by taxpayers. Throughout the report, adoptions that were reported

by the taxpayer as being foreign children with special needs are classified and included in the

tables as adoptions of foreign children.

In order to provide some information about the costs of adoptions, as reported, qualified

adoption expenses and employer payments or reimbursements have been tabulated without

regard to the statutory limits for which tax benefits may have been available. It should be

recognized, however, that for purposes of the tax credit, taxpayers do not have a financial

incentive to include qualified expenses in excess of the levels for which the tax credit may be

available. The data indicate that many taxpayers do show such information on their tax returns,

but the extent, if any, of non-reporting of excess expenses cannot be determined from the tax

return data. In addition, where reported expenses were adjusted because they were either missing

or were smaller than would be consistent with the reported adoption tax credit, the adjusted

qualified expenses were limited to the maximum amounts which would produce tax benefits.

The tables do not include information about taxpayers who received employer-paid

adoption benefits if, because of the employee’s income level, all of the employer benefits were

fully taxable. Employer benefits are not included in the taxable wages of employees as reported

to the employee and to IRS on the employee’s Wage and Tax Statement (Form W-2), but the

amount of such benefits is reported as a separate item on Form W-2. The taxable amount, if any,

of such benefits is reported by the employee on Form 8839. In 1997 and 1998, several hundred

higher-income taxpayers used Form 8839 to include in income the entire amount of the adoption

benefits received from the employer. When the entire amount was taxable, the taxpayer was

excluded from the tables for employer-provided adoption benefits. If the entire amount of

employer benefits was taxable and the taxpayer did not report any qualified expenses for

purposes of the adoption tax credit, the taxpayer was not included in any of the tables.

Number of Number of Qualified Value of Tax Benefits in 1997 Tax Credit

Returns2

Adoptions Adoption Employer Tax Total Carried

Expenses3

Exclusion Credit Forward

($ in 000s) ($ in 000s) ($ in 000s) ($ in 000s) ($ in 000s)

All Adoptions

Total 36,661 40,755 228,286 1,308 69,084 70,392 30,046

By Adjusted Gross Income

Under $15,000 846 971 3,941 14 49 63 2,113

$ 15,000 - $ 24,999 2,295 2,581 8,580 69 1,283 1,352 3,327

$ 25,000 - $ 49,999 11,844 13,237 56,122 323 20,782 21,105 10,068

$ 50,000 - $ 74,999 12,632 14,024 83,337 538 30,792 31,331 10,200

$ 75,000 - $ 99,999 6,934 7,647 57,392 323 14,578 14,902 4,138

$100,000 and over 2,110 2,295 18,915 40 1,600 1,640 200

By Filing Status

Married Filing Jointly 32,455 36,179 201,717 1,179 62,222 63,401 24,915

Other 4,206 4,576 26,569 129 6,862 6,991 5,131

Children with Special Needs (domestic)

Total 3,194 3,895 12,511 116 4,658 4,773 2,792

By Adjusted Gross Income

Under $15,000 100 130 321 2 5 6 214

$ 15,000 - $ 24,999 281 345 821 10 140 149 394

$ 25,000 - $ 49,999 1,257 1,545 4,221 39 1,754 1,793 1,049

$ 50,000 - $ 74,999 1,036 1,240 4,456 45 2,001 2,046 828

$ 75,000 - $ 99,999 422 521 2,108 19 690 709 290

$100,000 and over 98 114 584 1 69 70 16

By Filing Status

Married Filing Jointly 2,729 3,355 10,991 102 4,120 4,222 2,323

Other 465 540 1,520 14 538 552 469

Foreign Children1

Total 10,438 11,632 113,744 408 24,357 24,764 13,673

By Adjusted Gross Income

Under $15,000 156 181 1,694 1 10 11 724

$ 15,000 - $ 24,999 321 348 2,842 5 227 231 941

$ 25,000 - $ 49,999 2,636 2,921 25,190 59 6,207 6,266 4,363

$ 50,000 - $ 74,999 3,858 4,325 42,128 191 10,982 11,173 5,324

$ 75,000 - $ 99,999 2,613 2,905 31,479 137 6,173 6,310 2,212

$100,000 and over 854 952 10,410 16 756 772 111

By Filing Status

Married Filing Jointly 8,736 9,828 96,113 358 20,697 21,054 10,659

Other 1,702 1,804 17,630 50 3,660 3,710 3,014

U.S. Treasury Department September, 2000

 Office of Tax Analysis

Footnotes follow Table 98-8, at the end of this chapter.

Adoption Expenses and Tax Benefits, 1997:

Table 97 - 1

Adoption Tax Credit and Exclusion for Employer Benefits Combined
Percentage of Returns with Expenses (including Employer Reimbursements) per Return (%)

All Less Less Less Less Less Less Less Less $15,000

Returns2

Than Than Than Than Than Than Than Than And

$1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $10,000 $15,000 Over

All Adoptions

Total 36,661 24% 37% 44% 49% 54% 64% 77% 88% 12%

By Adjusted Gross Income

Under $15,000 846 31 48 56 61 66 76 86 93 7

$ 15,000 - $ 24,999 2,295 35 52 62 67 71 81 90 96 4

$ 25,000 - $ 49,999 11,844 30 45 54 60 65 74 85 93 7

$ 50,000 - $ 74,999 12,632 21 33 40 46 50 61 75 87 13

$ 75,000 - $ 99,999 6,934 16 26 32 36 40 51 66 81 19

$100,000 and over 2,110 15 23 29 32 36 47 63 78 22

By Filing Status

Married Filing Jointly 32,455 24 37 44 50 54 64 77 88 12

Other 4,206 22 36 44 48 52 62 76 87 13

Children with Special Needs (domestic)

Total 3,194 34% 50% 58% 65% 70% 75% 90% 96% 4%

By Adjusted Gross Income

Under $15,000 100 45 59 65 71 76 81 91 97 3

$ 15,000 - $ 24,999 281 38 57 64 73 77 81 95 98 2

$ 25,000 - $ 49,999 1,257 37 54 63 71 76 81 93 97 3

$ 50,000 - $ 74,999 1,036 31 46 55 61 67 72 88 95 5

$ 75,000 - $ 99,999 422 26 42 51 57 62 66 84 93 7

$100,000 and over 98 28 38 51 57 82 90 10

By Filing Status

Married Filing Jointly 2,729 33 49 58 65 70 75 89 96 4

Other 465 36 52 61 69 74 79 94 98 2

Foreign Children1

Total 10,438 12% 17% 20% 22% 24% 35% 49% 70% 30%

By Adjusted Gross Income

Under $15,000 156 8 12 19 22 25 37 53 72 28

$ 15,000 - $ 24,999 321 14 21 26 30 32 45 61 79 21

$ 25,000 - $ 49,999 2,636 14 20 24 27 29 41 57 76 24

$ 50,000 - $ 74,999 3,858 13 17 20 22 24 34 49 70 30

$ 75,000 - $ 99,999 2,613 11 15 17 19 20 29 43 64 36

$100,000 and over 854 10 14 16 18 20 30 43 64 36

By Filing Status

Married Filing Jointly 8,736 13 18 21 23 25 35 49 70 30

Other 1,702 10 14 17 18 20 32 53 73 27

U.S. Treasury Department September, 2000

 Office of Tax Analysis

Footnotes follow Table 98-8, at the end of this chapter.

Table 97 - 2

Percentage of Returns By Size of Expenses Including Total Employer Payments and Reimbursements, 1997

[--------44--------]
Table 97 - 3

Covered Adoptions, Expenses, and Tax Credit

Number of Number of Qualified

Returns4 Adoptions Adoption Total Allowed for 1997 Carried Forward

Expenses

($ in 000s) ($ in 000s) (number) ($ in 000s) (number) ($ in 000s)

All Adoptions

Total 36,375 40,440 220,355 99,130 34,868 69,084 14,923 30,046

By Adjusted Gross Income

Under $15,000 842 967 3,841 2,162 132 49 801 2,113

$ 15,000 - $ 24,999 2,285 2,569 8,038 4,610 1,894 1,283 1,428 3,327

$ 25,000 - $ 49,999 11,773 13,155 53,754 30,849 11,606 20,782 4,638 10,068

$ 50,000 - $ 74,999 12,535 13,921 80,565 40,992 12,468 30,792 5,414 10,200

$ 75,000 - $ 99,999 6,860 7,565 55,743 18,716 6,747 14,578 2,467 4,138

$100,000 and over 2,080 2,263 18,414 1,800 2,021 1,600 175 200

By Filing Status

Married Filing Jointly 32,199 35,897 194,543 87,137 30,937 62,222 12,724 24,915

Other 4,176 4,543 25,812 11,993 3,931 6,862 2,199 5,131

Children with Special Needs (domestic)

Total 3,171 3,865 11,792 7,450 2,979 4,658 1,155 2,792

By Adjusted Gross Income

Under $15,000 100 130 311 218 17 5 91 214

$ 15,000 - $ 24,999 280 343 755 533 222 140 171 394

$ 25,000 - $ 49,999 1,249 1,533 3,931 2,803 1,222 1,754 415 1,049

$ 50,000 - $ 74,999 1,028 1,231 4,202 2,829 1,017 2,001 335 828

$ 75,000 - $ 99,999 416 514 2,022 980 405 690 135 290

$100,000 and over 98 114 571 86 96 69 8 16

By Filing Status

Married Filing Jointly 2,710 3,330 10,360 6,443 2,557 4,120 957 2,323

Other 461 535 1,432 1,007 422 538 198 469

Foreign Children1

Total 10,382 11,569 111,390 38,030 10,065 24,357 5,767 13,673

By Adjusted Gross Income

Under $15,000 156 181 1,689 734 26 10 154 724

$ 15,000 - $ 24,999 321 348 2,801 1,167 264 227 244 941

$ 25,000 - $ 49,999 2,627 2,910 24,795 10,570 2,580 6,207 1,715 4,363

$ 50,000 - $ 74,999 3,840 4,307 41,178 16,306 3,815 10,982 2,395 5,324

$ 75,000 - $ 99,999 2,592 2,880 30,745 8,385 2,557 6,173 1,174 2,212

$100,000 and over 846 943 10,183 867 823 756 85 111

By Filing Status

Married Filing Jointly 8,682 9,767 94,014 31,356 8,427 20,697 4,625 10,659

Other 1,700 1,802 17,376 6,674 1,638 3,660 1,142 3,014

U.S. Treasury Department September, 2000

 Office of Tax Analysis

Footnotes follow Table 98-8, at the end of this chapter.

Adoption Credit

Adoption Tax Credit, 1997:
Percentage of Adoptions with Qualified Adoption Expenses per Adoption (%)

Less Less Less Less Less Less Less Less $15,000

All 4,11 Than Than Than Than Than Than Than Than And

$1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $10,000 $15,000 Over

All Adoptions

Total 39,798 29% 42% 48% 53% 57% 68% 80% 90% 10%

By Adjusted Gross Income

Under $15,000 941 37 52 60 64 69 80 88 94 6

$ 15,000 - $ 24,999 2,521 44 60 67 72 75 85 93 96 4

$ 25,000 - $ 49,999 12,915 37 51 59 64 68 77 88 94 6

$ 50,000 - $ 74,999 13,633 26 39 45 49 53 65 79 90 10

$ 75,000 - $ 99,999 7,527 20 29 35 39 43 54 70 84 16

$100,000 and over 2,261 18 26 31 34 38 50 67 82 18

By Filing Status

Married Filing Jointly 35,339 30 42 49 53 57 68 81 90 10

Other 4,459 27 40 47 51 55 65 79 89 11

Children with Special Needs (domestic)

Total 3,709 44% 59% 66% 72% 76% 80% 93% 97% 3%

By Adjusted Gross Income

Under $15,000 120 49 60 67 73 77 84 95 98 3

$ 15,000 - $ 24,999 327 50 67 73 80 83 86 97 98 2

$ 25,000 - $ 49,999 1,461 50 64 72 77 81 84 95 98 2

$ 50,000 - $ 74,999 1,185 41 56 63 67 72 76 92 97 3

$ 75,000 - $ 99,999 502 36 52 59 63 68 72 90 95 5

$100,000 and over 114 30 41 45 54 58 63 88 93 7

By Filing Status

Married Filing Jointly 3,206 45 59 66 71 75 79 93 97 3

Other 503 42 58 68 74 79 83 95 98 2

Foreign Children1

Total 11,425 14% 19% 21% 24% 25% 38% 55% 76% 24%

By Adjusted Gross Income

Under $15,000 179 8 13 19 23 27 41 59 78 22

$ 15,000 - $ 24,999 344 17 24 27 32 34 49 65 83 17

$ 25,000 - $ 49,999 2,878 16 22 26 29 31 44 62 81 19

$ 50,000 - $ 74,999 4,213 14 19 22 23 25 37 55 76 24

$ 75,000 - $ 99,999 2,870 12 16 18 19 21 32 48 71 29

$100,000 and over 941 12 16 17 19 21 33 49 71 29

By Filing Status

Married Filing Jointly 9,635 14 19 22 24 26 38 54 76 24

Other 1,790 12 16 18 20 21 35 57 76 24

U.S. Treasury Department September, 2000

 Office of Tax Analysis

Footnotes follow Table 98-8, at the end of this chapter.

Table 97 - 4

Adoption Tax Credit, 1997:

Percentage of Adoptions by Size of Qualified Adoption Expenses
Table 97 - 5

Employer-Provided Adoption Benefits, 1997:

Total and Excluded Employer Payments and Reimbursements and Tax Benefits

Number of Number of Tax 

Returns2

Adoptions Total5Taxable Non-Taxable Benefit6

Employer

Exclusion

($ in 000s) ($ in 000s) ($ in 000s) ($ in 000s)

All Adoptions

Total 2,937 3,270 7,931 1,480 6,451 1,308

By Adjusted Gross Income

Under $15,000 46 50 101 7 94 14

$ 15,000 - $ 24,999 198 225 541 83 458 69

$ 25,000 - $ 49,999 944 1,058 2,368 282 2,086 323

$ 50,000 - $ 74,999 1,021 1,137 2,772 267 2,505 538

$ 75,000 - $ 99,999 563 622 1,649 485 1,164 323

$100,000 and over 165 178 501 357 144 40

By Filing Status

Married Filing Jointly 2,635 2,940 7,175 1,380 5,794 1,179

Other 302 330 757 100 656 129

Children with Special Needs (domestic)

Total 291 350 719 85 634 116

By Adjusted Gross Income

Under $15,000 5 6 11 0 10 2

$ 15,000 - $ 24,999 25 33 66 1 65 10

$ 25,000 - $ 49,999 124 153 290 31 259 39

$ 50,000 - $ 74,999 96 108 254 26 228 45

$ 75,000 - $ 99,999 37 46 85 17 68 19

$100,000 and over 4 4 13 9 4 1

By Filing Status

Married Filing Jointly 254 308 631 82 549 102

Other 37 42 88 3 85 14

Foreign Children1

Total 785 886 2,353 540 1,813 408

By Adjusted Gross Income

Under $15,000 

$ 15,000 - $ 24,999 

$ 25,000 - $ 49,999 161 176 395 34 361 59

$ 50,000 - $ 74,999 304 349 951 85 866 191

$ 75,000 - $ 99,999 229 261 735 242 493 137

$100,000 and over 71 77 227 170 58 16

By Filing Status

Married Filing Jointly 686 782 2,099 503 1,596 358

Other 99 104 254 37 217 50

U.S. Treasury Department September, 2000

 Office of Tax Analysis

Footnotes follow Table 98-8, at the end of this chapter.

6

Employer Payments and Reimbursements

20 23 46 10 36
Table 97 - 6

Employer-Provided Adoption Benefits, 1997: 

Percentage of Returns by Size of Total Employer Payments or Reimbursements

Percentage of Returns with Employer Payments or Reimbursements per Return (%)

All Less Less Less Less Less Less Less Less $15,000

Returns2

Than Than Than Than Than Than Than Than And

$1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $10,000 $15,000 Over

All Adoptions

Total 2,937 12% 26% 61% 79% 87% 95% 99% 100% 0%

By Adjusted Gross Income

Under $15,000 46 20 35 67 89 93 98 100 100 0

$ 15,000 - $ 24,999 198 17 30 64 77 85 92 98 100 0

$ 25,000 - $ 49,999 944 15 30 65 80 89 97 99 100 0

$ 50,000 - $ 74,999 1,021 11 24 61 79 88 95 99 100 0

$ 75,000 - $ 99,999 563 8 21 56 78 85 94 99 100 0

$100,000 and over 165 6 12 46 78 85 95 99 100 0

By Filing Status

Married Filing Jointly 2,635 12 25 60 79 87 95 99 100 0

Other 302 13 30 67 82 89 96 99 100 0

Children with Special Needs (domestic)

Total 291 19% 35% 66% 81% 90% 95% 99% 100% 0%

By Adjusted Gross Income

Under $15,000 

$ 15,000 - $ 24,999 

$ 25,000 - $ 49,999 124 18 35 70 83 91 98 99 100 0

$ 50,000 - $ 74,999 96 17 30 63 78 89 95 98 100 0

$ 75,000 - $ 99,999 

$100,000 and over 

By Filing Status

Married Filing Jointly 254 20 34 66 80 90 95 99 100 0

Other 37 14 38 68 86 100 0

Foreign Children1

Total 785 7% 18% 54% 74% 82% 94% 99% 100% 0%

By Adjusted Gross Income

Under $15,000 

$ 15,000 - $ 24,999 

$ 25,000 - $ 49,999 161 15 28 68 81 86 98 100 100 0

$ 50,000 - $ 74,999 304 5 15 52 72 81 93 99 100 0

$ 75,000 - $ 99,999 229 4 17 50 73 80 92 98 100 0

$100,000 and over 71 7 11 41 72 80 93 100 100 0

By Filing Status

Married Filing Jointly 686 7 18 53 73 81 93 99 100 0

Other 99 8 18 66 83 88 100 0

U.S. Treasury Department September, 2000

 Office of Tax Analysis

Footnotes follow Table 98-8, at the end of this chapter.

0

[--------100--------]

[------------100------------]

100

100

63 100 100

41

0

41 27 66 80 90

100

0

[---------20---------] [-------------100-------------]

[--------100--------]

30 20

20 80

37 [--------87---------] 87
Table 97 - 7

Number of Number of Qualified Value of Tax Benefits in 1997 Tax Credit

Returns Adoptions Adoption Employer Tax Total Carry

Expenses3

Exclusion Credit Forward

($ in 000s) ($ in 000s) ($ in 000s) ($ in 000s) ($ in 000s)

All Adoptions

Total 2,651 2,955 23,435 1,185 5,243 6,427 2,121

By Adjusted Gross Income

Under $15,000 42 46 157 13 2 15 59

$ 15,000 - $ 24,999 188 213 1,047 65 103 168 273

$ 25,000 - $ 49,999 873 976 5,628 297 1,471 1,769 648

$ 50,000 - $ 74,999 924 1,034 8,768 489 2,395 2,884 797

$ 75,000 - $ 99,999 489 540 6,102 286 1,144 1,430 339

$100,000 and over 135 146 1,734 35 127 162 5

By Filing Status

Married Filing Jointly 2,379 2,658 21,192 1,071 4,821 5,891 1,783

Other 272 297 2,244 114 422 536 338

Children with Special Needs (domestic)

Total 268 320 1,585 105 405 510 233

By Adjusted Gross Income

Under $15,000 5 6 21 2 1 2 10

$ 15,000 - $ 24,999 24 31 114 9 13 22 41

$ 25,000 - $ 49,999 116 141 604 37 160 196 93

$ 50,000 - $ 74,999 88 99 614 41 179 220 65

$ 75,000 - $ 99,999 31 39 209 16 51 67 23

$100,000 and over 4 4 21 1 2 3 0

By Filing Status

Married Filing Jointly 235 283 1,434 94 367 461 199

Other 33 37 150 11 38 49 34

Foreign Children1

Total 729 823 10,916 377 1,901 2,278 1,006

By Adjusted Gross Income

Under $15,000 

$ 15,000 - $ 24,999 

$ 25,000 - $ 49,999 152 165 1,861 54 381 435 245

$ 50,000 - $ 74,999 286 331 4,306 180 916 1,096 471

$ 75,000 - $ 99,999 208 236 3,538 122 530 652 210

$100,000 and over 63 68 967 15 60 75 2

By Filing Status

Married Filing Jointly 632 721 9,575 329 1,680 2,009 832

Other 97 102 1,340 48 222 270 174

U.S. Treasury Department Septemer, 2000

 Office of Tax Analysis

Footnotes follow Table 98-8, at the end of this chapter.

Adoption Expenses and Tax Benefits for Taxpayers Using Both Adoption Benefits, 1997:

Adoption Tax Credit and Employer Exclusion Combined

20 23 244 6 15 21 79
Amount of Qualified Adoption Expenses per Return

All Less Less Less Less Less Less Less Less $15,000

Returns Than Than Than Than Than Than Than Than And

$1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $10,000 $15,000 Over

All Adoptions

Total 2,651 2% 9% 19% 31% 40% 47% 67% 81% 19%

By Adjusted Gross Income

Under $15,000 42 52 69 79 86 0

$ 15,000 - $ 24,999 188 3 12 34 52 64 71 87 92 8

$ 25,000 - $ 49,999 873 3 13 27 42 55 64 82 91 9

$ 50,000 - $ 74,999 924 2 6 14 27 34 40 62 80 20

$ 75,000 - $ 99,999 489 1 4 7 12 18 25 45 66 34

$100,000 and over 135 4 8 14 19 41 63 37

By Filing Status

Married Filing Jointly 2,379 2 9 18 30 39 47 66 81 19

Other 272 2 10 24 35 43 51 69 82 18

Children with Special Needs (domestic)

Total 268 4% 15% 27% 46% 58% 66% 86% 95% 5%

By Adjusted Gross Income

Under $15,000 

$ 15,000 - $ 24,999 

$ 25,000 - $ 49,999 116 4 16 31 50 62 71 90 96 4

$ 50,000 - $ 74,999 88 5 9 22 42 53 60 80 93 7

$ 75,000 - $ 99,999 

$100,000 and over

By Filing Status

Married Filing Jointly 235 4 15 28 47 57 65 84 94 6

Other 33 0 12 24 42 64 76 100 100 0

Foreign Children1

Total 729 0% 2% 6% 9% 12% 14% 29% 51% 49%

By Adjusted Gross Income

Under $15,000 

$ 15,000 - $ 24,999 

$ 25,000 - $ 49,999 152 0 7 14 18 22 26 45 61 39

$ 50,000 - $ 74,999 286 1 1 4 8 10 12 27 53 47

$ 75,000 - $ 99,999 

$100,000 and over

By Filing Status

Married Filing Jointly 632 0 2 6 9 12 14 28 50 50

Other 97 0 3 34 55 45

U.S. Treasury Department September, 2000

 Office of Tax Analysis

Footnotes follow Table 98-8, at the end of this chapter.

271 0 1 3 4 7 10 21 42 58

60 40

94 6

20 0 0 40

35 0 37 46

Table 97 - 8

Percentage of Returns by Size of Expenses Including Total Employer Payments and Reimbursements

for Taxpayers Using Both Adoption Benefits, 1997

29

[--------24--------] [--------100--------]

[--------2--------]

31 55 69 3

[---------25-------]

[--------9-------] [--------14-------]

[---------14-------] [--------------97---------------]

26 26 57 83

25 25
Table 98 - 1

Adoption Expenses and Tax Benefits, 1998:

Number of Number of Qualified Value of Tax Benefits in 1998 Tax Credit

Returns2,7 Adoptions Adoption Employer Tax Total Carried

Expenses3

Exclusion Credit Forward

($ in 000s) ($ in 000s) ($ in 000s) ($ in 000s) ($ in 000s)

All Adoptions

Total 45,349 50,353 296,601 1,691 99,851 101,542 47,826

By Adjusted Gross Income

Under $15,000 1,051 1,220 5,069 29 50 79 3,651

$ 15,000 - $ 24,999 2,266 2,543 9,208 80 818 897 6,287

$ 25,000 - $ 49,999 13,985 15,589 68,326 361 22,526 22,887 23,600

$ 50,000 - $ 74,999 15,947 17,654 106,552 703 47,691 48,394 11,692

$ 75,000 - $ 99,999 9,122 10,050 77,855 454 25,666 26,119 2,254

$100,000 and over 2,978 3,297 29,590 64 3,101 3,166 342

By Filing Status

Married Filing Jointly 39,722 44,267 260,115 1,511 87,805 89,315 39,769

Other 5,627 6,086 36,485 180 12,046 12,226 8,057

Children with Special Needs (domestic)

Total 3,915 4,721 16,723 128 6,969 7,097 5,040

By Adjusted Gross Income

Under $15,000 113 145 420 5 6 11 362

$ 15,000 - $ 24,999 245 289 692 12 68 79 596

$ 25,000 - $ 49,999 1,418 1,720 4,942 36 1,807 1,843 2,460

$ 50,000 - $ 74,999 1,360 1,643 5,898 51 3,312 3,363 1,394

$ 75,000 - $ 99,999 625 740 3,715 21 1,610 1,631 197

$100,000 and over 154 184 1,056 2 166 168 32

By Filing Status

Married Filing Jointly 3,329 4,044 14,749 108 6,155 6,263 4,267

Other 586 677 1,973 21 814 835 773

Foreign Children1

Total 12,705 14,264 140,869 558 37,470 38,028 18,461

By Adjusted Gross Income

Under $15,000 173 198 1,888 1 8 9 1,023

$ 15,000 - $ 24,999 353 395 3,508 5 169 174 1,881

$ 25,000 - $ 49,999 2,991 3,333 28,787 69 6,650 6,720 8,822

$ 50,000 - $ 74,999 4,768 5,346 52,080 264 18,212 18,477 5,514

$ 75,000 - $ 99,999 3,229 3,634 39,345 191 10,942 11,132 1,061

$100,000 and over 1,191 1,358 15,260 28 1,490 1,517 159

By Filing Status

Married Filing Jointly 10,350 11,780 116,824 480 30,509 30,989 14,215

Other 2,355 2,484 24,045 78 6,962 7,039 4,245

U.S. Treasury Department September, 2000

 Office of Tax Analysis

Footnotes follow Table 98-8, at the end of this chapter.

Adoption Tax Credit and Exclusion for Employer Benefits Combined
Percentage of Returns with Expenses (including Employer Reimbursements) per Return (%)

All Less Less Less Less Less Less Less Less $15,000

Returns2,7 Than Than Than Than Than Than Than Than And

$1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $10,000 $15,000 Over

All Adoptions

Total 45,349 21% 34% 42% 47% 51% 64% 75% 87% 13%

By Adjusted Gross Income

Under $15,000 1,051 28 44 52 59 63 76 84 93 7

$ 15,000 - $ 24,999 2,266 32 50 57 63 67 80 89 95 5

$ 25,000 - $ 49,999 13,985 27 43 53 58 62 74 84 92 8

$ 50,000 - $ 74,999 15,947 19 33 41 46 50 62 74 87 13

$ 75,000 - $ 99,999 9,122 12 22 29 34 38 51 64 80 20

$100,000 and over 2,978 15 22 26 30 33 46 59 75 25

By Filing Status

Married Filing Jointly 39,722 21 35 42 47 51 64 75 87 13

Other 5,627 19 33 43 49 52 65 75 86 14

Children with Special Needs (domestic)

Total 3,915 31% 46% 55% 62% 66% 71% 88% 96% 4%

By Adjusted Gross Income

Under $15,000 113 37 55 62 67 71 75 92 95 5

$ 15,000 - $ 24,999 245 40 58 67 73 75 80 96 99 1

$ 25,000 - $ 49,999 1,418 36 52 63 69 73 78 92 98 2

$ 50,000 - $ 74,999 1,360 29 44 53 60 64 69 89 96 4

$ 75,000 - $ 99,999 625 21 33 44 49 55 59 79 91 9

$100,000 and over 154 23 30 37 45 48 51 77 89 11

By Filing Status

Married Filing Jointly 3,329 30 45 54 61 65 70 88 96 4

Other 586 37 53 62 69 74 78 93 97 3

Foreign Children1

Total 12,705 8% 14% 19% 21% 23% 37% 48% 69% 31%

By Adjusted Gross Income

Under $15,000 173 7 15 17 20 22 40 50 71 29

$ 15,000 - $ 24,999 353 9 12 18 19 21 45 55 75 25

$ 25,000 - $ 49,999 2,991 9 16 23 26 27 44 55 76 24

$ 50,000 - $ 74,999 4,768 9 15 20 23 24 38 48 70 30

$ 75,000 - $ 99,999 3,229 6 10 14 16 18 31 42 64 36

$100,000 and over 1,191 12 14 16 17 18 31 40 60 40

By Filing Status

Married Filing Jointly 10,350 9 15 19 21 23 36 47 68 32

Other 2,355 6 12 19 21 23 40 52 73 27

US Treasury Department September 15, 2000

 Office of Tax Analysis

Footnotes follow Table 98-8, at the end of this chapter.

Table 98 - 2

Percentage of Returns By Size of Expenses Including Total Employer Payments and Reimbursements, 1998
Table 98 - 3

Adoption Tax Credit, 1998: 

Covered Adoptions, Expenses, and Tax Credit

Returns with Qualified Adoption Credit Carry Forward Credit Credit

1998 Credit for 1998 From 1997 Taken in Carried

and/or Carry Returns Adoptions Amount Returns Amount 1998 Forward 

Forward to 1999

From 1997 (number) (number) ($ in 000s) ($ in 000s) (number) ($ in 000s) ($ in 000s) ($ in 000s)

All Adoptions

Total 49,690 44,718 49,644 286,673 133,497 11,257 24,285 104,349 53,433

By Adjusted Gross Income

Under $15,000 1,320 1,030 1,196 4,850 3,032 521 1,458 52 4,438

$ 15,000 - $ 24,999 2,603 2,198 2,463 8,592 5,791 939 2,236 868 7,159

$ 25,000 - $ 49,999 15,296 13,827 15,414 65,535 40,301 3,996 8,922 23,688 25,535

$ 50,000 - $ 74,999 17,338 15,745 17,423 102,675 54,932 3,699 7,345 49,407 12,869

$ 75,000 - $ 99,999 9,858 8,980 9,894 75,347 26,475 1,544 3,168 26,821 2,822

$100,000 and over 3,275 2,938 3,254 29,675 2,967 558 1,156 3,513 609

By Filing Status

Married Filing Jointly 43,426 39,182 43,664 251,206 115,847 9,501 20,233 91,585 44,495

Other 6,264 5,536 5,980 35,467 17,650 1,756 4,052 12,764 8,938

Children with Special Needs (domestic)

Total 4,170 3,857 4,653 15,841 10,620 838 2,138 7,247 5,511

By Adjusted Gross Income

Under $15,000 126 108 138 385 289 48 117 6 400

$ 15,000 - $ 24,999 283 235 278 604 524 101 252 73 703

$ 25,000 - $ 49,999 1,518 1,404 1,704 4,646 3,672 341 892 1,886 2,679

$ 50,000 - $ 74,999 1,418 1,340 1,619 5,580 4,267 236 606 3,411 1,462

$ 75,000 - $ 99,999 658 616 730 3,578 1,707 84 206 1,680 233

$100,000 and over 167 154 184 1,047 160 28 66 191 35

By Filing Status

Married Filing Jointly 3,551 3,276 3,982 14,010 9,263 693 1,819 6,405 4,677

Other 619 581 671 1,831 1,357 145 318 842 833

Foreign Children1

Total 14,122 12,561 14,094 137,915 49,855 3,822 9,690 39,206 20,339

By Adjusted Gross Income

Under $15,000 227 173 198 1,882 832 98 387 9 1,211

$ 15,000 - $ 24,999 411 345 387 3,452 1,633 164 625 179 2,079

$ 25,000 - $ 49,999 3,385 2,955 3,293 28,301 13,162 1,264 3,368 7,069 9,461

$ 50,000 - $ 74,999 5,321 4,720 5,287 50,694 21,531 1,505 3,439 18,935 6,035

$ 75,000 - $ 99,999 3,487 3,191 3,588 38,286 11,290 582 1,368 11,363 1,295

$100,000 and over 1,291 1,177 1,341 15,300 1,407 209 502 1,651 258

By Filing Status

Married Filing Jointly 11,489 10,231 11,637 114,178 40,042 3,008 7,567 31,881 15,728

Other 2,633 2,330 2,457 23,737 9,813 814 2,123 7,325 4,611

U.S. Treasury Department September, 2000

 Office of Tax Analysis

Footnotes follow Table 98-8, at the end of this chapter.

Expenses, 19984,8
Table 98 - 4

Adoption Tax Credit, 1998: 

Percentage of Adoptions by Size of Expenses

Amount of Qualified Adoption Expenses per Adoption

All4,8,11 Less Less Less Less Less Less Less Less $15,000

Than Than Than Than Than Than Than Than And

$1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $10,000 $15,000 Over

All Adoptions

Total 49,104 26% 40% 46% 51% 54% 68% 79% 89% 11%

By Adjusted Gross Income

Under $15,000 1,196 37 52 58 63 66 80 88 94 6

$ 15,000 - $ 24,999 2,461 42 58 63 66 69 84 91 95 5

$ 25,000 - $ 49,999 15,304 34 50 57 62 65 78 87 94 6

$ 50,000 - $ 74,999 17,203 24 38 45 49 53 66 78 89 11

$ 75,000 - $ 99,999 9,752 16 27 33 37 40 55 68 83 17

$100,000 and over 3,188 14 22 26 30 33 49 63 78 22

By Filing Status

Married Filing Jointly 43,154 27 40 46 51 54 68 79 89 11

Other 5,950 24 38 47 52 54 68 77 87 13

Children with Special Needs (domestic)

Total 4,587 41% 55% 63% 68% 72% 76% 92% 97% 3%

By Adjusted Gross Income

Under $15,000 138 54 67 72 79 4

$ 15,000 - $ 24,999 278 54 70 76 78 80 84 97 99 1

$ 25,000 - $ 49,999 1,690 47 63 70 75 78 82 95 98 2

$ 50,000 - $ 74,999 1,583 38 52 60 67 70 75 93 97 3

$ 75,000 - $ 99,999 720 28 42 50 56 60 67 84 93 7

$100,000 and over 178 24 35 42 49 54 57 83 93 7

By Filing Status

Married Filing Jointly 3,922 40 54 62 67 70 75 92 97 3

Other 665 47 62 70 75 79 83 94 98 2

Foreign Children1

Total 13,832 10% 16% 20% 22% 24% 42% 53% 74% 26%

By Adjusted Gross Income

Under $15,000 198 10 16 20 23 25 44 60 76 24

$ 15,000 - $ 24,999 387 11 14 18 21 25 51 60 79 21

$ 25,000 - $ 49,999 3,263 11 19 25 27 29 48 61 80 20

$ 50,000 - $ 74,999 5,185 11 18 22 24 26 43 54 74 26

$ 75,000 - $ 99,999 3,502 9 13 15 18 19 36 47 70 30

$100,000 and over 1,297 9 12 14 16 18 35 45 66 34

By Filing Status

Married Filing Jointly 11,391 11 16 20 22 24 42 53 74 26

Other 2,441 8 14 20 23 24 43 55 74 26

US Treasury Department 15-Sep-00

 Office of Tax Analysis

Footnotes follow Table 98-8, at the end of this chapter.

[--------75--------] [--------96--------]
Table 98 - 5

Employer-Provided Adoption Benefits, 1998:

Total and Excluded Employer Payments and Reimbursements and Tax Benefits

Number of Number of Tax 

Returns2

Adoptions Total5Taxable Non Taxable Benefit6

Employer

Exclusion

($ in 000s) ($ in 000s) ($ in 000s) ($ in 000s)

All Adoptions

Total 3,892 4,309 10,817 2,128 8,689 1,686

By Adjusted Gross Income

Under $15,000 90 105 220 17 203 29

$ 15,000 - $ 24,999 261 303 616 51 565 80

$ 25,000 - $ 49,999 1,106 1,236 2,791 282 2,509 361

$ 50,000 - $ 74,999 1,357 1,497 3,877 400 3,477 703

$ 75,000 - $ 99,999 831 897 2,508 799 1,710 454

$100,000 and over 247 271 805 580 225 60

By Filing Status

Married Filing Jointly 3,460 3,830 9,693 1,992 7,701 1,506

Other 432 479 1,123 135 988 180

Children with Special Needs (domestic)

Total 369 427 909 161 748 128

By Adjusted Gross Income

Under $15,000 17 22 35 0 35 5

$ 15,000 - $ 24,999 36 43 88 4 84 12

$ 25,000 - $ 49,999 130 153 296 34 262 36

$ 50,000 - $ 74,999 123 139 317 56 261 51

$ 75,000 - $ 99,999 51 57 137 46 91 21

$100,000 and over 12 13 35 19 16 2

By Filing Status

Married Filing Jointly 309 356 763 144 620 108

Other 60 71 145 17 128 21

Foreign Children1

Total 1,073 1,206 3,415 837 2,577 557

By Adjusted Gross Income

Under $15,000 3 3 7 0 7 1

$ 15,000 - $ 24,999 20 22 56 7 49 5

$ 25,000 - $ 49,999 173 198 486 32 455 69

$ 50,000 - $ 74,999 430 484 1,386 128 1,258 264

$ 75,000 - $ 99,999 329 364 1,059 347 712 191

$100,000 and over 118 135 422 324 98 27

By Filing Status

Married Filing Jointly 936 1,062 3,014 792 2,222 479

Other 137 144 401 46 355 78

U.S. Treasury Department September, 2000

 Office of Tax Analysis

Footnotes follow Table 98-8, at the end of this chapter.

Employer Payments and Reimbursements
Table 98 - 6

Employer-Provided Adoption Benefits, 1998: 

Percentage of Returns by Size of Total Employer Payments or Reimbursements

Percentage of Returns with Employer Payments or Reimbursements per Return (%)

All Less Less Less Less Less Less Less Less $15,000

Returns2

Than Than Than Than Than Than Than Than And

$1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $10,000 $15,000 Over

All Adoptions

Total 3,892 9% 21% 62% 80% 86% 96% 99% 100% 0%

By Adjusted Gross Income

Under $15,000 90 18 32 63 88 94 0

$ 15,000 - $ 24,999 261 16 35 72 87 92 96 0

$ 25,000 - $ 49,999 1,106 12 27 68 85 90 97 99 100 0

$ 50,000 - $ 74,999 1,357 8 20 61 78 85 96 99 100 0

$ 75,000 - $ 99,999 831 5 14 56 76 84 96 99 100 0

$100,000 and over 247 4 9 47 74 81 94 98 100 0

By Filing Status

Married Filing Jointly 3,460 9 20 61 80 86 96 99 100 0

Other 432 13 29 65 83 89 96 98 100 0

Children with Special Needs (domestic)

Total 369 15% 30% 65% 85% 92% 97% 0%

By Adjusted Gross Income

Under $15,000 17 35 59 100 0

$ 15,000 - $ 24,999 36 14 31 64 83 100 0

$ 25,000 - $ 49,999 130 18 39 68 85 92 97 100 100 0

$ 50,000 - $ 74,999 123 12 24 64 85 91 97 0

$ 75,000 - $ 99,999 

$100,000 and over

By Filing Status

Married Filing Jointly 309 15 29 66 85 92 96 100 100 0

Other 60 13 37 60 82 93 100 100 100 0

Foreign Children1

Total 1,073 4% 12% 52% 73% 80% 94% 98% 100% 0%

By Adjusted Gross Income

Under $15,000 

$ 15,000 - $ 24,999 

$ 25,000 - $ 49,999 173 5 13 59 83 88 97 0

$ 50,000 - $ 74,999 430 5 13 53 70 77 94 97 100 0

$ 75,000 - $ 99,999 329 2 11 50 71 80 94 98 99 1

$100,000 and over 118 39 69 77 90 97 100 0

By Filing Status

Married Filing Jointly 936 4 11 51 72 79 93 98 100 0

Other 137 4 15 57 78 84 97 0

U.S. Treasury Department September, 2000

 Office of Tax Analysis

Footnotes follow Table 98-8, at the end of this chapter.

[--------100--------]

[------------100------------]

[--------100--------]

[--------100---------]

[---------------------------100--------------------------]

[------------100------------]

[--------100--------]

65 [--------100--------] 100 0

[--------100--------]

23 87 87

[--------5--------]

[--------26--------]

63 8 17 59 83 90 [--------100--------] 100 0
Table 98 - 7

Number of Qualified Value of Tax Benefits in 1998 Tax Credit

Returns7 Adoptions Adoption Employer Tax Total Carry

Expenses3

Exclusion Credit Forward

($ in 000s) ($ in 000s) ($ in 000s) ($ in 000s) ($ in 000s)

All Adoptions

Total 3,261 3,600 32,030 1,447 7,510 8,957 2,685

By Adjusted Gross Income

Under $15,000 69 81 389.50 23.32 1.45 25 162

$ 15,000 - $ 24,999 193 223 927.68 58.24 41.49 100 372

$ 25,000 - $ 49,999 948 1,061 6,446.88 317.52 1,413.28 1,731 1,235

$ 50,000 - $ 74,999 1,155 1,266 12,249.71 608.91 3,746.26 4,355 790

$ 75,000 - $ 99,999 689 741 8,687.75 386.23 2,087.79 2,474 113

$100,000 and over 207 228 3,328.20 53.20 219.55 273 14

By Filing Status

Married Filing Jointly 2,920 3,227 29,269 1,300 6,867 8,167 2,316

Other 341 373 2,761 147 643 790 370

Children with Special Needs (domestic)

Total 311 359 2,133 112 550 662 336

By Adjusted Gross Income

Under $15,000 12 15 61 4 0 5 25

$ 15,000 - $ 24,999 26 32 99 8 3 11 52

$ 25,000 - $ 49,999 116 137 647 34 140 174 149

$ 50,000 - $ 74,999 103 115 786 45 275 320 93

$ 75,000 - $ 99,999 42 47 435 18 121 139 17

$100,000 and over 12 13 106 2 11 13 0

By Filing Status

Married Filing Jointly 256 294 1,855 92 479 571 278

Other 55 65 279 19 71 91 58

Foreign Children1

Total 929 1,036 14,835 489 3,015 3,504 1,055

By Adjusted Gross Income

Under $15,000 

$ 15,000 - $ 24,999 

$ 25,000 - $ 49,999 137 158 2,026 58 307 365 442

$ 50,000 - $ 74,999 382 425 6,007 236 1,561 1,797 443

$ 75,000 - $ 99,999 291 318 4,691 167 1,020 1,187 59

$100,000 and over 104 118 1,852 23 123 146 7

By Filing Status

Married Filing Jointly 817 919 13,272 421 2,648 3,070 906

Other 112 117 1,563 67 367 434 150

U.S. Treasury Department September, 2000

 Office of Tax Analysis

Footnotes follow Table 98-8, at the end of this chapter.

Adoption Expenses and Tax Benefits for Taxpayers Using Both Adoption Benefits, 1998:

Adoption Tax Credit and Employer Exclusion Combined

15 17 259 4 4 9 105
Amount of Qualified Adoption Expenses per Return

All Less $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $10,000 $15,000

Returns7

Than To To To To To To To And

$1,000 $1,999 $2,999 $3,999 $4,999 $5,999 $9,999 $14,999 Over

All Adoptions

Total 3,261 2% 6% 17% 28% 36% 43% 62% 76% 24%

By Adjusted Gross Income

Under $15,000 69 4 12 32 57 68 75 86 90 10

$ 15,000 - $ 24,999 193 7 21 36 60 70 76 92 95 5

$ 25,000 - $ 49,999 948 2 9 28 44 55 64 81 89 11

$ 50,000 - $ 74,999 1,155 1 4 13 22 30 36 56 73 27

$ 75,000 - $ 99,999 689 8 12 17 22 43 64 36

$100,000 and over 207 0 12 34 53 47

By Filing Status

Married Filing Jointly 2,920 1 6 17 27 35 42 61 76 24

Other 341 2 9 24 40 48 55 72 82 18

Children with Special Needs (domestic)

Total 311 4% 10% 27% 41% 52% 59% 78% 91% 9%

By Adjusted Gross Income

Under $15,000 

$ 15,000 - $ 24,999 

$ 25,000 - $ 49,999 116 4 11 34 50 63 72 89 95 5

$ 50,000 - $ 74,999 103 3 7 20 34 46 52 70 90 10

$ 75,000 - $ 99,999 

$100,000 and over

By Filing Status

Married Filing Jointly 256 4 9 27 40 50 56 75 91 9

Other 55 31 47 64 73 0

Foreign Children1

Total 929 3% 6% 9% 11% 25% 46% 54%

By Adjusted Gross Income

Under $15,000 

$ 15,000 - $ 24,999 

$ 25,000 - $ 49,999 137 0 0 7 12 36 53 47

$ 50,000 - $ 74,999 382 4 7 12 14 27 46 54

$ 75,000 - $ 99,999 291 0 4 7 8 22 47 53

$100,000 and over 104 0 0 0 14 33 67

By Filing Status

Married Filing Jointly 817 3 6 9 11 24 44 56

Other 112 0 0 5 9 15 18 38 57 43

US Treasury Department September, 2000

 Office of Tax Analysis

Footnotes follow Table 98-8, at the end of this chapter.

[--------1%--------]

[--------19--------]

[--------1--------]

[--------3--------]

[----------------3----------------]

[--------1--------]

79

57 80

[--------13--------]

[--------3--------]

[--------2--------]

[--------8--------]

54 63 71

Table 98 - 8

Number of Returns by Size of Expenses Including Total Employer Payments and Reimbursements 

for Taxpayers Using Both Adoption Benefits, 1998

54 [----------31--------]

38 14 32

0 [----------------20----------------]

0

33 33 67

20

[--------100--------]

0 0

[--------100---------]

15 0 0 0 0
47

FOOTNOTES FOR TABLES 4-2, 4-3, 97-1 THROUGH 97-8, AND 98-1 THROUGH 98-8

1. Adoptions of foreign children include those reported as being both foreign and special needs.

2. Returns with only fully taxable employer benefits are not included in this table.

3. Qualified adoption expenses are the sum of qualified expenses for the tax credit and

employer benefits (taxable and non-taxable).

4. Returns with positive qualified expenses, but zero credit and carryforward due to incomerelated phaseout are not included in this column.

5. Total may not equal the sum of taxable and non-taxable benefits due to rounding.

6. Tax benefits are the tax savings from having the non-taxable employer benefits excluded

from taxable income. Tax benefits have been estimated by applying the appropriate marginal

tax rate (including a zero rate, if appropriate) or rates to non-taxable employer benefits. The

tax effects of interactions due to the exclusion of employer benefits have not been included.

7. Returns with only a carryforward from 1997 and without any qualified expenses or employer

benefits for 1998 are not included in this table.

8. The number of adoptions represented by these returns can be found in the following table.

9. Only returns with qualified expenses or employer benefits (non-taxable and taxable) in 1997

and 1998 are shown in this table.

10. Total credits are the sum of the credit taken in 1997, the credit taken in 1998, and the

carryforward from 1998 to 1999.

11. Excludes tax returns for which total qualified adoption expenses cannot be allocated among

two or more adoptees.

General Notes:

• Details may not add to totals due to rounding.

• Bracketed cells indicate that the number or percentage of taxpayers or adoptions reported

have been combined, as necessary, to avoid disclosure of specific taxpayer information.

• Excludes employer payment or reimbursement information for tax returns on which

employer-paid benefits were fully taxable because the modified adjusted gross income of the

taxpayer was $115,000 or more.

• Excludes adoption tax credit information for tax returns reporting qualified adoption

expenses but no adoption tax credit because the modified adjusted gross income of the

taxpayer was $115,000 or more.

• Excludes a small number of tax returns with significant, unresolved data inconsistencies.

49

Chapter V

OBSERVATIONS CONCERNING FEDERAL TAX BENEFITS FOR ADOPTIONS

The Congress enacted tax benefits for adoption in order to remove financial costs as a

barrier to adoption and to further encourage the adoption of children with special needs. This

chapter includes observations about the structure, beneficiaries, complexity, and administrability

of the tax benefits, and the interaction between tax and expenditure programs for adoption.

BENEFICIARIES OF THE ADOPTION TAX PROVISIONS

Income Ranges for Receiving Benefits

The adoption tax provisions help families meet the expenses associated with an adoption,

which can be substantial. In order to benefit from the provisions, a family must have income

high enough to generate tax liability (before the adoption tax credit or exclusion is taken) and

have income below the top of the adoption phaseout range ($115,000).

The benefits for adoption may be limited unless the adopting family has sufficient tax

liability prior to consideration of the adoption benefits. Adoption tax credits in excess of liability

do not result in a payment to the taxpayer from the Internal Revenue Service (that is, they are not

“refundable”), but unused tax credits may be carried forward for use in the five succeeding years.

The exclusion for employer-paid or reimbursed adoption expenses does not provide any tax

benefit unless the family would have some tax liability from the payment or reimbursement

absent the exclusion, and unlike the credit, the value of unused benefits may not be carried

forward.

In order to receive the full benefit of a $5,000 adoption tax credit in the current year, a

family must have sufficient income to have $5,000 of tax liability. Even for a family with no

other children, using the standard deduction, and using only the $500 per child tax credit, a

family must have income of $52,400 (in tax year 2000) to have $5,000 of tax liability.1

 Having

any other nonrefundable tax credits or having other dependents further increases the minimum

required income. (The required income levels for three and four person families with and

without child and dependent care credits are shown in Table 5-1.) The relatively high levels of

income at which taxpayers have sufficient liability to claim the full credit in the initial year,

together with the phaseout of the tax credit, affect the distribution of benefits. Taxpayers with

AGIs of $50,000 to $75,000 represented 35 percent of all taxpayers claiming a credit or

exclusion in 1998 and had 36 percent of adoption expenses and 48 percent of tax benefits.

 

1

 Required incomes in future years would be higher due to the annual indexing of personal

exemptions, the standard deduction, and tax bracket widths for the effects of inflation.
Table 5 - 1

 Minimum Income Required to Fully Utilize the Maximum Amount

 Of the Adoption Tax Credit for One Adopted Child

(Married Couple Filing Joint Tax Return, 2000)

$5,000 Adoption Credit $6,000 Adoption Credit1

Situation Used In Used Over Used In Used Over

One Year Six Years One Year Six Years

No Other Children

No Child Care Credit 52,400 24,650 59,100 25,750

$480 Child Care Credit 55,600 27,850 61,050 28,950

One Other Child

No Child Care Credit 58,550 30,750 63,900 31,900

$480 Child Care Credit 61,750 34,000 65,600 35,100

$960 Child Care Credit 63,750 37,150 67,350 38,300

US Treasury Department September 2000

 Office of Tax Analysis

1

 The $6,000 maximum credit is only for adoptions of children with special needs.

Note: Assumes taxpayers use the standard deduction, the $500 per child tax credit, 

and the child and dependent care credit, as specified in the table.
51

Permitting unused adoption tax credits to be carried forward and used against future tax

liability for up to five additional years widens the income range over which the adoption tax

credit is beneficial, but at some point during the carryover period, the family must have income

tax liability against which the credit can be taken. Inability to obtain full benefit from the tax

credit in the current year may result in the potential adopting family not having the resources to

pay adoption expenses as they occur and may discourage some families from undertaking an

adoption. A three-person family that uses the standard deduction and the $500 child credit (and

has no other tax credits) requires income of at least $24,650 in 2000 (and slightly more in each of

the five successive years) in order to fully utilize a $5,000 adoption credit over the five-year

carryforward period (see Table 5-1).

Situations in Which Adoption Tax Benefits Are Not Available

In addition to adoptions for which tax benefits are reduced or are not available because of

the incomes of the adopting parents, benefits are not available for the over 50,000 stepparent

adoptions that are estimated to occur each year. Stepparent adoptions do incur some of the same

costs as other adoptions, such as legal fees. Particularly for lower-income families, such costs

could be a barrier to adoption.

Especially for adoptions of children with special needs, adopting families may be

concerned about incurring financial burdens in addition to the initial costs of adoption and the

normal costs of rearing a child. Such extra costs may be, or may be seen to be, a sufficiently

large potential burden to present a barrier to adoption. However, such concerns may be

unwarranted. Some costs, including some normal costs of raising a child, are covered through

expenditure programs for most adoptive children with special needs, and some of the necessary

services may be provided directly. Medicaid services also are available to many children with

special needs.1

Benefits by Type of Adoption

The 31,400 adoptions of non-foreign, non-special needs children for which tax benefits

were claimed in 1998 represented 62 percent of all adoptions for which tax benefits were claimed

and received 56 percent of adoption tax benefits used to reduce 1998 tax.

In 1998, 28 percent of the adoptions for which tax benefits were received were for

adoptions of foreign children, and 37 percent of total tax benefits were for these adoptions.

Average adoption expenses are significantly higher for adoptions of foreign children, and

expenses exceed levels eligible for maximum adoption tax credits for 76 percent of such

adoptions. Although the number of adoptions of foreign children has been increasing rapidly, the

increase began prior to enactment of the adoption tax benefits. By offsetting about half of the

average total cost of the adoption of a foreign child, the adoption tax benefits may encourage

additional adoptions of foreign children.

 

1

 See Appendix B for a brief description of adoption assistance programs under Title IV-E of the

Social Security Act.
52

Only 9 percent of the adoptions for which any adoption tax benefits were taken in 1998

were of children with special needs. The average expense for the adoptions of children with

special needs for which a tax benefit was claimed was lower than for other types of adoptions, so

tax benefits for special needs adoptions were only 7 percent of the total tax benefits. The 4,700

special needs adoptions for which any tax benefits were claimed in 1998 represented 15 percent

of the estimated total number of special needs adoptions. Presumably, expenditure programs

paid or reimbursed the qualified adoption expenses for the other 85 percent of special needs

adoptions.

Relationship of Reported Expenses to the Maximum Credit or Exclusion

For 1998, qualified adoption expenses were less than the maximum amounts eligible for

the adoption tax credit for 65 percent of the adoptions of non-foreign, non-special needs children

and were within $1,000 of those limits for an additional 13 percent of adoptions. Taxpayers

reporting adoptions of foreign children reported expenses within the limits in 24 percent of cases

and were above the limit by no more than $1,000 in an additional 18 percent of adoptions. The

qualified expenses of families adopting children with special needs were less than the special

$6,000 limit in 76 percent of such adoptions for which the tax credit was reported. When the

total number of adoptions of children with special needs is considered, including the 85 percent

that do not receive adoption tax benefits (most likely because of direct reimbursements under

other programs), only about 4 percent of families adopting children with special needs report

qualified adoption expenses of more than the amounts eligible for tax benefits. To the extent that

the initial costs of adoption may be a barrier to the adoption of children with special needs, the

current tax benefits, together with the payments or reimbursements under combined State and

Federal programs, seem to have provided a comprehensive solution, covering all such qualified

expenses in the vast majority of cases.

Overall, 49 percent of taxpayers using the tax credit or exclusion, or both, for 1998

reported expenses exceeding $5,000 per tax return. However, the percentage exceeding $5,000

increased with income, ranging from 34 percent for families with incomes under $25,000, to 50

percent for families with incomes between $50,000 and $75,000, and to 67 percent for families

with incomes over $100,000. (Note that income eligibility ends at $115,000 of modified

adjusted gross income.)

Exclusion for Employer-Paid or Employer-Reimbursed Adoption Benefits

The income exclusion for employer-paid or employer-reimbursed adoption expenses is

used for less than one-tenth as many adoptions as is the adoption tax credit, and less than 2

percent of total tax benefits for adoption are from the exclusion. Having two separate tax

benefits for adoption adds some complexity to the tax system. The availability of two separate

tax benefits does increase the maximum possible tax benefit for adoption, but only for families
53

whose employers provide such benefits.2 According to a recent survey, 10 percent of full-time

employees in medium and large establishments are offered an adoption benefit.3 An adoption

credit may be of relatively little immediate value to moderate income families; employer

reimbursement of expenses in the current year may be more valuable to these families. The

exclusion from income tax may encourage more employers to offer this benefit.4

GENERAL ISSUES REGARDING TAX BENEFITS

Behavioral effects. As is true for most other tax benefits for individuals, the adoption

tax benefits are available to all taxpayers who meet the criteria, regardless of whether their

activity (in this case, adoption) is induced by the tax benefits or would have occurred in any

event. The data do not permit a determination of the extent to which tax benefits for adoption

may have increased the number of adoptions.

Because the number of healthy non-foreign infants available for adoption is less than the

number of families seeking to adopt such infants, tax benefits cannot increase the number of such

adoptions.5

 Tax benefits, however, may help increase the number of adoptions of children with

special needs and foreign children, since the numbers of both of those categories of children

available for adoption exceeds the number of current adoptions. By reducing the costs of

adoptions of foreign children, the tax benefits tend to increase the number of adoptions of foreign

children. The impact, however, on the number of adoptions of children with special needs is

more complicated. There are two offsetting effects. The reduction in the cost of adoption for

children with special needs for whom the entire adoption cost would not be reimbursed fully by

public programs tends to increase the number of adoptions of such children. Offsetting that

tendency is the fact that the adoption tax benefits generally reduce the cost of adopting a foreign

child compared to the cost of adopting a child with special needs whose adoption costs are

reimbursed by government programs. The net impact of these two opposing effects on the

number of adoptions of children with special needs is ambiguous. Although the number of

adoptions of children with special needs has increased in recent years, it cannot be determined

whether the number is larger or smaller than it would have been in the absence of the current tax

provisions for adoption.

 

2

 Although employer reimbursements above the $5,000 (or $6,000) limit do not qualify for either

the exclusion or the tax credit, any employee expenditures which are not reimbursed by the employer are

qualified expenses for purposes of the tax credit. Thus, with respect to a single adoption, a worker could

receive tax benefits for up to $10,000 of adoption expenses (up to $12,000 for the adoption of a child

with special needs). Although the tax benefits from the employer exclusion may be less than from the

tax credit for similar amounts of qualified expenses, the combination of the employer payment plus the

benefit of the exclusion generally approximates the value of the tax credit.

3

 United States Department of Labor, Employee Benefits in Medium and Large Private

Establishments, 1997. p. 8.

4

 Employer reimbursements that are excludable for income tax purposes are subject to Social

Security and Medicare taxes.

5

 There is no reason to believe that the availability of tax benefits for adoptive parents increases

the number of healthy, non-foreign infants available for adoption.
54

Changes in the after-tax cost may have encouraged particular taxpayers, especially those

with moderate incomes, to undertake the adoptions of children who would have been adopted in

any event. Neither tax nor other currently available data permit an evaluation of the extent to

which tax benefits may have affected the decisions of specific individuals who succeed in

adopting children.

100 percent tax credits. Generally, tax credits are some percentage, but less than 100

percent, of a taxpayer’s qualified expense. Tax credits for 100 percent of an expense are unusual,

but not unprecedented, in the Federal income tax system.6 A 100 percent tax credit means that

qualified expenses are fully paid by the government. As a result, adopting families whose

expenses do not exceed the statutory maximum and who can make full use of the tax credit in the

current year do not have a strong financial incentive to control their expenses or to resist fee

increases by service providers and intermediaries. Financial incentives to control expenses are

lessened, but not eliminated, for taxpayers whose expenses are not fully covered by a tax credit

or employer reimbursement. To the extent that the tax benefits permit third parties to raise fees,

those third parties, rather than the adopting families, are the beneficiaries of the adoption tax

provisions.

Tax benefits versus direct expenditures. The value of a 100 percent tax credit

generally will have the same value to the adopting family as would a direct government

expenditure program that paid or reimbursed taxpayers’ expenses, provided that the benefits

under both programs are made available to the taxpayer at about the same time. Two provisions

of the adoption tax benefits may delay when the value from them is received. First, for expenses

paid in years prior to the year in which the adoption becomes final, the expenses are not

considered for the adoption tax credit until the following year, or later. Second, taxpayers must

have sufficient tax liability against which the tax credit may be deducted. Otherwise, some or all

of the benefits from the tax credit will be delayed until later years.

Providing benefits via the income tax system may eliminate the need for interaction with

another government agency to obtain the reimbursement and may reduce the duplication of

information, especially information about income, provided to the government. However, with

fewer limitations and conditions, tax benefits for adoption may be payable to a larger number of

adopting families. As a result, if the same level of benefits is provided for each adoption, the tax

program will have a greater total cost. Alternatively, for the same level of aggregate

expenditures, the tax program may not achieve the same increase in the number of adoptions that

would be achievable under an expenditure program of similar cost.

 

6

 The income tax credit for the employer share of social security and Medicare taxes paid on the

tip income of certain classes of tipped employees is an example of another 100 percent income tax credit.

The credit is limited to the taxpayer’s income tax liability (i.e., it is not refundable), and unused credits

may not be carried forward to future years. See section 45B of the Internal Revenue Code of 1986.
55

COMPLEXITY AND TAXPAYER BURDEN

In order to claim the benefits of the adoption tax credit or the employer exclusion,

taxpayers must complete and file IRS Form 8839 as part of their annual income tax return. Form

8839 is two pages long and its instructions are four pages long and include several “worksheets”

and several complicated instructions which provide information on how to proceed in different

situations.7 Before completing the tax form, taxpayers need to gather information about the

expenses incurred in the adoption process, determine which expenses are “qualifying,” and

determine the year in which those qualifying expenses may be claimed for income tax purposes.

Form 8839 is one of the more complicated income tax forms that middle- and lowerincome taxpayers need to use. Even if the computational complexity is handled for the taxpayer

by computerized tax preparation software, complexity remains from the determination of

qualifying expenses and from dealing with concepts that are unfamiliar to most taxpayers. For

many users, some or all of the tax credit may have to be carried forward to, and considered for

use in, future years. If taxpayers make errors in required arithmetic computations which require

follow-up correspondence with the IRS or when the IRS requests verification of reported

expenses, burdens will increase for the affected taxpayers. Moreover, taxpayer burden is

compounded by the fact that Form 8839 is generally used by a given taxpayer for only one or two

adoptions, so that the taxpayer’s burden is not reduced through experience from repetitive use.

The extra tax return completion complexity and burdens imposed on taxpayers who

receive these two benefits is directly related to the statutory elements of the provisions and is the

minimal amount essential to the computation of the benefits and to alert the IRS that benefits are

being claimed. The tax filing process does not require taxpayers to submit with their tax returns

either the details of their expenses by category or documents verifying the expenses.

Some adopting families may elect to obtain their adoption tax benefits through reduced

income tax withholding on wages and salaries rather than through a tax refund during the

following calendar year. To accomplish that, the family’s worker or workers will face the

additional complexity and burden of determining, and applying for, the appropriate downward

adjustment to their withholding in the year in which they are eligible for the adoption tax

benefits, followed by a reversal of that adjustment in the following year (or the year after they

have used all of their tax credit carryforwards).

ADMINISTRATIVE ISSUES

Providing benefits for adoption through the Federal income tax system rather than

through a direct outlay program results in some administrative benefits as well as some

administrative burdens.

The prime administrative benefit for taxpayers is eliminating the need to deal with a

separate government agency and to file separate forms to obtain payment of, or reimbursement

 

7

 A copy of Form 8839 for 1998 and its instructions is contained in Appendix A.
56

for, adoption-related expenses. To the extent that benefits may depend on family income, use of

the Federal tax system reduces the need for families to supply to another government agency

income information that has already been provided to the IRS.8 Dealing with IRS as part of the

income tax filing process also eliminates the need for a separate government payment; the

adoption tax benefits are provided simply through a reduction in the payment the taxpayer would

otherwise have to make or an increase in the tax refund to the taxpayer. However, providing

benefits through the tax system adds somewhat to the complexity of the tax system for all

taxpayers.9

IRS examinations of the adoption-related portion of income tax returns impose

administrative burdens on adoptive families. Not having to include substantiation of adoption

expenses with the tax return and not having third-party reporting of such expenses directly to the

IRS may result in taxpayers understating or overstating qualified expenses and including nonqualified expenses. Because the adoption provisions apply to only a tiny fraction of taxpayers

(under 0.05 percent), IRS examiners are likely to have only limited expertise about the eligibility

of various types of expenditures. Omissions of qualified adoption expenses are less likely to be

discovered, to the adopting family’s disadvantage, than would be the case under a direct outlay

program. Even IRS examinations that could help taxpayers claim additional adoption benefits

may place taxpayers under stress. Because the adoption benefits are part of the tax system,

examinations must be performed under the rules for tax examinations, which can be both

burdensome and stressful for taxpayers. And, if an examination uncovers errors or some claimed

expenses are determined to be ineligible for the tax credit or exclusion, taxpayers will be subject

to interest and, possibly, penalties in addition to having to pay back the tax benefits already

received.

 

8

 Reimbursements for the expenses of the adoptions of children with special needs are not based

on the income of the adopting family.

9

 The vast majority of taxpayers without adoption expenses have only a slight additional burden

imposed from having to determine that the tax form line for the adoption credit does not apply to them.

Taxpayers with adoption expenses that may only be considered in a future year and taxpayers with

income exceeding the income related phaseout have greater additional burdens due to the data collection

and calculations they are likely to perform before they realize that they not are entitled to benefits in the

current year.
57

Appendix A

INCOME TAX FORM AND INSTRUCTIONS FOR ADOPTION BENEFITS FOR 1998
OMB No. 1545-1552 Qualified Adoption Expenses Form 8839

© Attach to Form 1040 or 1040A.

Department of the Treasury

Internal Revenue Service

Attachment

© See separate instructions. Sequence No. 38

Name(s) shown on return Your social security number

Information About Your Eligible Child or Children—You must complete this part. See the instructions for

details, including what to do if you need more space.

(b) 

Child’s year

of birth

(c) 

born before

1980 and

was disabled

1

(a) 

Child’s name

Adoption Credit

2

Did you file a 1997 Form 8839?

Enter $5,000 ($6,000 for a child with special

needs) 

3

3

Enter the smaller of line 4 or line 5

4

5

Add the amounts on line 6. If zero, skip lines 8-11, enter -0- on line 12, and go to line 13 7

10 3

Subtract line 11 from line 7

9

For Paperwork Reduction Act Notice, see page 4 of instructions. Form 8839 (1998)

Before you begin, you need to understand the following terms. See Definitions on page 1 of the instructions.

Cat. No. 22843L

Part I

Part II

2

.

(d)

a child

with special

needs

(f)

Child’s

identifying number

First Last

19

If line 8 is $75,000 or less, skip lines 9 and 10 and enter -0- on

line 11. If line 8 is over $75,000, subtract $75,000 from the amount

on line 8

6

9

7

Divide line 9 by $40,000. Enter the result as a decimal (rounded to at least three places). Do

not enter more than “1.000”

Multiply line 7 by line 10

8

4

Check if child was—

(e)

a

foreign

child

● Eligible Child ● Employer-Provided Adoption Benefits ● Qualified Adoption Expenses

19

Child

1

Child

2

Caution: If you received employer-provided adoption benefits, complete Part III on the back next.

10

Child 1 Child 2

Enter your modified adjusted gross income (see instructions) 8

11

Caution: If the eligible child is a foreign child, you

can take the credit only if the adoption was final in or

before 1998.

Subtract line 3 from line 2

Enter the total qualified adoption

expenses you paid in:

5

6

12

13 Enter any credit carryforward from 1997 (line 11 of your 1997 Form 8839)

Add lines 12 and 13. Then, see the instructions for the amount of credit to enter on Form 1040,

line 45, or Form 1040A, line 30

1997 credit carryforward to 1999 (see instructions)

1998 credit carryforward to 1999 (see instructions)

14

15

16

Note: If the credit you enter on Form 1040, line 45, or Form 1040A, line 30, is equal to the

total of lines 12 and 13, stop; you do not have any credit to carry forward to 1999.

15

14

13

16

11

12

1998

No. Enter -0-.

Yes. See the instructions for the amount

to enter.

● 1997 if the adoption was not final by the

end of 1998.

● 1997 and 1998 if the adoption was final

in 1998.

● 1998 if the adoption was final before

1998.

%

%
Form 8839 (1998) Page 2

Employer-Provided Adoption Benefits

Add the amounts on line 20

24

20

Enter your modified adjusted gross

income (from the worksheet in the

instructions)

If line 24 is $75,000 or less, skip

lines 25-27 and enter the amount

from line 23 on line 28. If line 24 is

over $75,000, subtract $75,000

from the amount on line 24

Excluded benefits. Enter the smaller of line 23 or line 28 29

30

Part III

27

Enter the total amount of your

employer-provided adoption benefits

received in 1998. This amount should be

shown in box 13 of your 1998 W-2 form(s)

with code T 

18 Did you receive employer-provided

adoption benefits for 1997?

Divide line 25 by $40,000. Enter the result as a decimal (rounded

to at least three places). Do not enter more than “1.000”

25

Multiply line 23 by line 26

26

Subtract line 27 from line 23

Taxable benefits. Subtract line 29 from line 21. Also, include this amount on Form 1040,

line 7, or Form 1040A, line 7. On the line next to line 7, enter “AB”

29

28

27

26 3 .

21

22 Enter the smaller of line 19 or line 20

24

28

30

25

If the total adoption expenses you paid in 1998 were not fully reimbursed by your employer AND the adoption was final in

or before 1998, you may be able to claim the adoption credit in Part II on the front of this form.

Caution: If the eligible child is a foreign child, see

Special Rules in the instructions for line 1, column

(e), before completing this part.

21

22

20

18

Child 1 Child 2

23

Add the amounts on line 22. If zero, skip lines 24-28, enter -0- on

line 29, and go to line 30

23

No. Enter -0-.

Yes. See the instructions for

the amount to enter.

Subtract line 18 from line 17. If zero or

less, enter -0-

19

19

%

17 Enter $5,000 ($6,000 for a child with

special needs) 17
1998 Department of the Treasury

Internal Revenue Service

Instructions for Form 8839

Qualified Adoption Expenses

General Instructions

Purpose of Form

You may be able to take the adoption credit if you paid

qualified adoption expenses in:

● 1997, or 

● 1998 and the adoption was final in or before 1998.

Use Form 8839 to figure the amount of your credit.

If you received any employer-provided adoption

benefits for 1998, you MUST use Form 8839 to figure the

amount, if any, of benefits you may exclude from your

income on line 7 of Form 1040 or Form 1040A. You need

to complete Part III of Form 8839 before you can figure

the credit, if any, in Part II.

Caution: Special rules apply if you paid expenses or

received benefits in connection with the adoption of an

eligible foreign child. See the instructions for line 1,

column (e), for details.

Definitions

Eligible Child

An eligible child is:

● Any child under age 18. If the child turned 18 during the

year, the child is an eligible child for the part of the year

he or she was under age 18.

● Any disabled person not able to care for himself or

herself.

Caution: If you and another person adopted or tried to

adopt an eligible child, see the instructions for line 2 (or

line 17 if applicable) before you enter an amount on that

line.

Employer-Provided Adoption Benefits

These are amounts your employer paid directly to either

you or a third party for qualified adoption expenses. Your

salary may have been reduced to pay for these benefits.

Employer-provided adoption benefits should be shown in

box 13 of your 1998 W-2 form(s) with code T. 

Qualified Adoption Expenses

For purposes of the credit, these are the reasonable and

necessary expenses directly related to, and for the

principal purpose of, the legal adoption of an eligible child.

Qualified adoption expenses include: 

● Adoption fees.

● Attorney fees.

● Court costs.

● Travel expenses (including meals and lodging) while

away from home.

Qualified adoption expenses do not include expenses:

● For which you received funds under any state, local, or

Federal program.

● That violate state or Federal law.

● For carrying out a surrogate parenting arrangement.

● For the adoption of your spouse's child.

● Paid or reimbursed by your employer or any other

person or organization.

● Paid before 1997.

● Allowed as a credit or deduction under any other

provision of Federal income tax law.

Who May Take the Adoption Credit or

Exclude Employer-Provided Adoption

Benefits?

You may take the credit or exclusion if all three of the

following apply.

1. Your filing status is Single, Head of household,

Qualifying widow(er) with dependent child, or Married

filing jointly. However, if your filing status is Married filing

separately, see Married Persons Filing Separate

Returns below.

2. Your modified AGI (adjusted gross income) is less

than $115,000. To figure your modified AGI, see the

instructions for line 8 (for the credit) or line 24 (for the

exclusion).

3. You report the required information about the

eligible child on line 1.

Caution: Special rules apply if the eligible child is a

foreign child. See the instructions for line 1, column (e),

for details.

Married Persons Filing Separate Returns

You may take the credit or exclusion if you meet items 2

and 3 listed above and all of the following apply.

● You lived apart from your spouse during the last 6

months of 1998.

● The eligible child lived in your home more than half of

1998.

● You provided over half the cost of keeping up your

home.

Line Instructions

Line 1

Complete all columns that apply to the eligible child you

adopted or tried to adopt. If you do not give correct or

complete information, your credit (and any applicable

exclusion) may be disallowed.

If you cannot give complete information because you

tried to adopt an eligible child but were not successful or

the adoption was not final by the end of 1998, complete

the entries you can on line 1. Enter “See Page 2” in the

columns for which you do not have the information. Then,

on the bottom of page 2, enter the name and address of

Cat. No. 23077T
any agency or agent (such as an attorney) that assisted

in the attempted adoption.

Child 1 or Child 2

If you tried to adopt one eligible child and you made more

than one attempt to do so, combine the amounts you

spent and enter the total on the “Child 1” line. Do not

report the additional attempt(s) on the “Child 2” line.

Complete the “Child 2” line only if you adopted or tried to

adopt two eligible children. If you adopted or tried to adopt

more than two eligible children, see More Than Two

Eligible Children on this page.

Caution: If you filed a 1997 Form 8839 in connection with

this adoption, enter your 1998 information on the same

line (Child 1 or Child 2) that you used for 1997.

Column (a)

Enter the eligible child's name.

Column (c)

Check this box if the child was born before 1980 and was

disabled. A child is disabled if the child is physically or

mentally unable to care for himself or herself.

Column (d)

Check this box if the child was also a child with special

needs. A child is a child with special needs if both of the

following apply.

1. The child was a citizen or resident of the United

States or its possessions at the time the adoption process

began.

2. A state (including the District of Columbia) has

determined that the child cannot or should not be returned

to his or her parents' home and probably will not be

adopted unless assistance is provided to the adoptive

parents. Factors used by states to make this

determination include:

● The child's ethnic background and age,

● Whether the child is a member of a minority or sibling

group, and

● Whether the child has a medical condition or a physical,

mental, or emotional handicap.

Caution: If you check this box, be sure to keep evidence

of the state's determination in your records.

Column (e)

Check this box if the child was a foreign child. A child is

a foreign child if he or she was not a citizen or resident

of the United States or its possessions at the time the

adoption process began.

Special Rules. If you paid qualified adoption expenses

in connection with the adoption of a foreign child and the

adoption was not final by the end of 1998, you cannot 

use those expenses to figure your 1998 adoption credit.

Do not include them on line 5 of Form 8839. If the

adoption becomes final in 1999, you may be able to take

a credit for those expenses on your 1999 return.

If you received employer-provided adoption benefits

in 1998 in connection with the adoption of a foreign child

and the adoption was not final by the end of 1998, you

must include the benefits in the total entered on Form

1040, or Form 1040A, line 7. Also, enter “AB” (adoption

benefits) next to line 7. If the adoption becomes final in

1999, you may be able to exclude the benefits from your

1999 income.

Exclusion of 1997 benefits. If you received

employer-provided adoption benefits in 1997 in

connection with the adoption of a foreign child and the

adoption was final in 1998, you may be able to exclude

part or all of those benefits from your 1998 income. To find

out if you can, complete Part III of Form 8839 through line

29. However, on line 18, enter zero. On line 20, enter the

total amount of employer-provided adoption benefits

received in 1997 and 1998. On the dotted line next to line

20, enter “97 AB” and the amount of 1997 benefits

received. Then, use the worksheet below to figure the

amount of any 1997 benefits you may exclude and the

amount, if any, to enter on line 30.

Column (f)

Enter the child's identifying number. This may be a social

security number (SSN), an adoption taxpayer identification

number (ATIN), or an individual taxpayer identification

number (ITIN).

To get an —

● SSN, use Form SS-5. 

● ATIN, use Form W-7A. 

● ITIN, use Form W-7. 

More Than Two Eligible Children

If you adopted or tried to adopt more than two eligible

children, fill in and attach as many Forms 8839 as you

need to list them. Also, enter “See Attached” to the right

of the Caution below line 1.

For Part II, fill in lines 2 through 6 for each child. But fill

in lines 7 through 16 on only one Form 8839. The amount

on line 7 of that Form 8839 should be the combined total

of the amounts on line 6 of all the Forms 8839.

Exclusion of 1997 Benefits Worksheet

(keep for your records)

1. Is the amount on your 1998 Form 8839, line

29, less than the amount on line 21?

No. Go to line 4.

Yes. Subtract line 29 from line 21 ............... 1.

2. Enter the 1997 employer-provided adoption

benefits included on line 20 for the child..... 2.

3. Taxable benefits. Subtract line 2 from line

1. Enter the result, but not less than zero,

here and on Form 8839, line 30. Also,

include this amount, if more than zero, on

line 7 of Form 1040 or Form 1040A. On the

line next to line 7, enter “AB”....................... 3.

4. Enter the amount from Form 8839, line 29 . 4.

5. Enter the 1998 employer-provided adoption

benefits included on line 20 for the child..... 5.

Note: If line 5 is equal to or more than line

4, stop here; you cannot exclude any of

your 1997 benefits.

6. 1997 excluded benefits. Subtract line 5

from line 4 .................................................... 6.

Next: Figure the total you would enter on

line 7 of Form 1040 or Form 1040A before

you exclude the amount from line 6 above.

Then, subtract the amount from line 6

above from that total. Enter the result on

line 7 of Form 1040 or Form 1040A. On the

line next to line 7, enter “97 AB” and the

amount from line 6 above.

Page 2
 For Part III, fill in lines 17 through 20 and 22 for each

child. But fill in lines 21 and 23 through 30 on only one

Form 8839. The amount on line 21 of that Form 8839

should be the combined total of the amounts on line 20

of all the Forms 8839, and the amount on line 23 should

be the combined total of the amounts on line 22.

Line 2

Enter $5,000 ($6,000 if the child was also a child with

special needs). If you and another person each paid

qualified adoption expenses to adopt the same child, the

$5,000 limit (or $6,000 if applicable) must be divided

between the two of you in any way you both agree. If the

other person is your spouse and you are filing a joint

return, this rule does not apply.

Line 3

If you filed a 1997 Form 8839 in connection with the

adoption of the child, enter the amount shown on line 4

of that form for the child. If you filed a 1997 Form 8839 in

connection with the adoption of another child, enter zero.

Line 8

Use the following chart to find your modified AGI (adjusted

gross income) to enter on line 8.

IF you file... THEN enter on line 8 the amount

from...

Form 1040

Form 1040A

Form 1040, line 34, increased by the

total of any:

● Amount from–

● Exclusion of income from Puerto

Rico, and

Form 1040A, line 19

● Form 2555, lines 43 and 48.

● Form 2555-EZ, line 18.

● Form 4563, line 15.

Line 14

The amount of your credit may be limited. To find out if it

is, complete the Credit Limit Worksheet on this page.

Lines 15 and 16

If you had to replace the amount on line 14 of Form 8839

with a new amount from the Credit Limit Worksheet, you

have an unused credit to carry forward to the next 5 years

or until used, whichever comes first. Use the worksheet

below to figure the amount of your credit carryforward. If

you have any unused credit to carry forward to 1999, be

sure you keep a copy of your 1998 Form 8839. You will

need it to figure your credit for 1999.

Credit Limit Worksheet—Line 14

(keep for your records)

Caution: Form 1040 filers, if you are claiming the mortgage

interest credit (see the instructions for Form 1040, line 47),

complete Form 8396 before you begin.

1. Form 1040 filers, enter the amount from

Form 1040, line 40, minus the total of any

amounts on lines 41 through 44, and any

mortgage interest credit from Form 8396,

line 11. Form 1040A filers, enter the

amount from Form 1040A, line 25, minus

the total of any amounts on lines 26 through

29 .................................................................. 1.

2. Enter the amount from Form 8839, line 14 2.

3. Enter the smaller of line 1 or line 2. Also,

enter this amount on Form 1040, line 45,

or Form 1040A, line 30. If line 1 is the

smaller amount, replace the amount on

Form 8839, line 14, with that new amount... 3.

Credit Carryforward Worksheet—Lines 15 and 16 

(keep for your records)

1. Enter the amount from line 2 of the Credit

Limit Worksheet above ................................. 1.

2. Enter the new amount from Form 8839,

line 14 ........................................................... 2.

3. Subtract line 2 from line 1 ............................ 3.

4. Do you have a credit carryforward from

1997?

No. Stop here; enter -0- on Form 8839,

line 15, and enter the amount from

line 3 above on line 16.

Yes. Enter the amount from Form 8839,

line 13 ................................................. 4.

5. If line 4 above is equal to or less than line

2, enter -0-. If line 4 is more than line 2,

subtract line 2 from line 4............................. 5.

6. Subtract line 5 from line 3. If the result is

zero, enter -0- ............................................... 6.

Next: Enter the amount, if more than zero,

from line 5 above on Form 8839, line 15.

Then, enter the amount, if more than zero,

from line 6 above on Form 8839, line 16.

Page 3
Line 17

Enter $5,000 ($6,000 if the child was also a child with

special needs). If you and another person each received

employer-provided adoption benefits in connection with

the adoption of the same eligible child, the $5,000 limit (or

$6,000 if applicable) must be divided between the two of

you in any way you both agree. If the other person is your

spouse and you are filing a joint return, this rule does not

apply.

Line 18

If you received employer-provided adoption benefits in

1997 in connection with the adoption of the child, enter the

amount shown on line 15 of your 1997 Form 8839 for the

child. If the 1997 benefits were received in connection

with the adoption of a different child, enter zero on line 18.

Caution: If the 1997 benefits were received in connection

with the adoption of a foreign child and the adoption was

final in 1998, see Exclusion of 1997 benefits on page

2.

Line 24

Follow these steps before you fill in the line 24 worksheet

on this page.

Step Action

1

2

Figure the amount you would enter on line 7

of Form 1040 or 1040A if you could exclude

the total amount on Form 8839, line 21.

If you received social security benefits, use

Pub. 915 to figure the taxable amount of

your benefits.

5 Complete the following lines on your return if

they apply:

IF you file... THEN complete...

Form 1040

Form 1040A

Lines 8a, 8b, 9 through

21, 23, and 25 through

31a

Lines 8a, 8b, 9 through

13b, and 15

If you made contributions to a traditional IRA

for 1998 and you were covered by a

retirement plan at work or through

self-employment, use Pub. 590 to figure your

IRA deduction.

3

4 If you file Form 1040, figure any amount to

be entered on the dotted line next to line 32.

Paperwork Reduction Act Notice. We ask for the

information on this form to carry out the Internal Revenue

laws of the United States. You are required to give us the

information. We need it to ensure that you are complying

with these laws and to allow us to figure and collect the

right amount of tax.

You are not required to provide the information

requested on a form that is subject to the Paperwork

Reduction Act unless the form displays a valid OMB

control number. Books or records relating to a form or its

instructions must be retained as long as their contents

may become material in the administration of any Internal

Revenue law. Generally, tax returns and return

information are confidential, as required by Internal

Revenue Code section 6103.

The time needed to complete and file this form will vary

depending on individual circumstances. The estimated

average time is: Recordkeeping, 46 min.; Learning

about the law or the form, 20 min.; Preparing the form,

1 hr., 31 min.; and Copying, assembling, and sending

the form to the IRS, 35 min.

If you have comments concerning the accuracy of these

time estimates or suggestions for making this form

simpler, we would be happy to hear from you. See the

instructions for Form 1040 or 1040A.

Modified AGI Worksheet—Line 24

(keep for your records)

1. Enter the amount you would enter on line

7 of Form 1040 or 1040A if you could

exclude the total amount on Form 8839, line

21 ................................................................. 1.

2. Enter the amount from Form 8839, line 21 . 2.

3. Form 1040 filers, add the amounts on lines

8a, 9 through 14, 15b, 16b, 17 through 19,

20b, and 21. Enter the total. Form 1040A

filers, add the amounts on lines 8a, 9, 10b,

11b, 12, and 13b. Enter the total................. 3.

4. Add lines 1, 2, and 3.................................... 4.

5. Form 1040 filers, enter the total of the

amounts from lines 23 and 25 through 31a,

plus any amount entered on the dotted line

next to line 32. Form 1040A filers, enter

the amount from line 15............................... 5.

6. Subtract line 5 from line 4............................ 6.

Form 1040 filers, increase the amount on

line 6 above by the total of the following

amounts. Enter the total on Form 8839, line

24.

• Any amount from Form 2555, lines 43

and 48; Form 2555–EZ, line 18; and

Form 4563, line 15, and

• Any exclusion of income from Puerto

Rico.

Form 1040A filers, enter on Form 8839,

line 24, the amount from line 6 above.

Caution: For purposes of the credit, your modified AGI may be

different. If you are taking the credit, be sure to read the

instructions for line 8 on page 3 before you enter an amount on

that line. 

Page 4

65

Appendix B

FEDERAL EXPENDITURE PROGRAMS FOR ADOPTION

The Federal programs promoting adoption are administered through direct expenditure

programs and tax benefits. This appendix provides a brief overview of the major expenditure

programs. Federal expenditure programs in support of adoption are focused on children in the

child welfare system, generally children who are or, who have been, in foster care. Federal

outlays for non-tax adoption assistance programs, both initial adoption assistance and continuing

support, were $707 million in Fiscal Year 1998, $839 million in Fiscal Year 1999, and are

estimated to be $980 million in Fiscal year 2000.

TITLE IV-E ADOPTION ASSISTANCE PROGRAM

The Federal program to assist adoption was established by the Adoption Assistance and

Child Welfare Act of 1980, P.L. 96-272. The program is intended to assure that families

adopting children with special needs from the public child welfare system would have the

necessary services and funding to meet the children's significant and varied needs. The Title IVE program provides funds to States to assist in paying maintenance costs for adopted children

who are eligible for Temporary Assistance to Needy Families (TANF) or Supplemental Security

Income (SSI) and who are children with special needs as defined by the particular State.1

 Funds

are also used for the administrative costs of managing the program and training staff. The goal of

this program is to facilitate the placement of hard-to-place children in permanent adoptive homes

and thus prevent long, inappropriate stays in foster care. Federal funds for continuing assistance

are matched by State funds at the same rate as Medicaid. Federal funds for one-time adoption

expenses are matched by State funds at a 50 percent rate. For 1998, 31,115 of the 36,000

children adopted from the public foster care system were receiving continuing support.2

Additional data on children in foster care are provided in Chapter IV.

Each State must establish a Title IV-E adoption assistance program that provides to families

adopting eligible children:

• Monthly maintenance payments;

• Medicaid coverage;

• Certain social services; and

• Reimbursement of up to $2,000 for nonrecurring (one-time) adoption expenses.

 

1 Children with special needs are generally children who are older, have physical or mental

disabilities, and/or have siblings who also need adoptive parents. In some States, racial characteristics

may also be a criterion for special needs. The exact definition of special needs children depends on State

law. Certain children who are determined to have special needs by a State are eligible for support and

adoption assistance from programs financed solely by State funds.

2

 United States Department of Health and Human Services, Administration for Children and

Families, The AFCARS Report, Interim Estimates for Fiscal Year 1998 - - April 2000 (3).
66

TITLE IV-B, SUBPART 1, CHILD WELFARE SERVICES PROGRAM

The Title IV-B, subpart 1, Child Welfare Services Program provides funding for State

public welfare agencies to improve their child welfare services with the goal of keeping families

together. State services include preventive intervention, so that, if possible, children will not

have to be removed from their homes; services to develop alternative placements such as foster

care or adoption, if children cannot remain at home; and reunification services so that, if

possible, children who have been removed from their homes can return home.

TITLE IV-B, SUBPART 2, PROMOTING SAFE AND STABLE FAMILIES PROGRAM

The Title IV-B, subpart 2, Promoting Safe and Stable Families program is a more

restricted program which provides funds to States for family support, family preservation, timelimited family reunification, and adoption promotion and support.

ADOPTION OPPORTUNITIES GRANT PROGRAM

Funds from the Adoption Opportunities Grant Program provide support for

demonstration projects that facilitate the elimination of barriers to adoption and provide

permanent homes for children who would benefit from adoption, particularly children with

special needs. The Administration on Children, Youth and Families in the Department of Health

and Human Services expects to award approximately 110 new competitive grants in fiscal year

2000 with funding at approximately $11 million for Adoption Opportunities grants.

ADMINISTRATION INITIATIVES

On December 14, 1996, President Clinton issued an Executive Memorandum that

directed the Secretary of Health and Human Services to recommend strategies to accelerate the

movement of children from foster care into permanent homes. The goal was to double the

number of adoptions and other permanent placements from the public foster care system by the

year 2002. The Executive Memorandum also called for continued aggressive implementation of

the Howard M. Metzenbaum Multiethnic Placement Act of 1994, as amended (MEPA), P.L. 103-

382 and Section 1808, Removal of Barriers to Interethnic Adoption, of the Small Business Job

Protection Act of 1996, P.L. 104-188, and for the development and dissemination of information

about the new adoption tax credits and other adoption benefits.

Strategies for implementing that Presidential directive were presented in Adoption 2002:

A Response to the Presidential Executive Memorandum on Adoption.3

 This document, Adoption

2000, is a blueprint for Federal leadership in adoption for children in the public child welfare

system. Adoption 2002 outlined an agenda to overcome barriers to the placement of children

from foster care to permanent homes and barriers to accelerating the path to permanent

placement for all children waiting in the public child welfare system.

 

3

 U.S. Department of Health and Human Services, Administration for Children and Families,

February 14, 1997.
67

On November 24, 1998, President Clinton issued an Executive Memorandum, "Using the

Internet to Increase Adoptions," which instructed the Department of Health and Human Services

to expand use of the Internet to share information about children who are legally free for

adoption in order to shorten the time needed to find them adoptive families.

ADOPTION AND SAFE FAMILIES ACT OF 1997

The Adoption and Safe Families Act of 1997 (ASFA), P.L 105-89, contained provisions

to help accelerate and insure the movement of children from the States’ child welfare systems to

adoptive homes or other permanent placements. Its provisions parallel and implement the central

recommendations of the Administration’s Adoption 2002 initiative.

ASFA’s goal is to shorten the time frame for making permanency planning decisions,

establish a time frame for initiating proceedings to terminate parental rights, clarify reasonable

efforts to return the child to the parental home, and call for every State to ensure that its laws and

regulations comply with the new provisions, so that children in the State’s child welfare system

are able to move to adoptive homes or other permanent placement more quickly.

ASFA also provided an incentive to States to increase the number of adoptions for

children waiting in the foster care system. In Fiscal Year 2000, 44 States and jurisdictions

received shares of the $19 million in adoption incentive awards based on their Fiscal Year 1999

performance.

CHILD WELFARE DEMONSTRATION WAIVERS

The Adoption and Safe Families Act of 1997 also authorized the Department of Health

and Human Services to approve up to 10 demonstration projects each year through 2002. These

demonstration projects involve the waiver of certain requirements of titles IV-B and IV-E, the

sections that govern foster care, adoption assistance, independent living, child welfare services,

promoting safe and stable families, family preservation and support, and related expenses for

program administration, training and automated systems. This authority provides States with an

opportunity to develop approaches to remove the many barriers that may exist between children

waiting in foster care and their adoption or permanent placement. The States can design and

demonstrate a wide range of approaches to improve and reform child welfare. Twenty-four child

welfare demonstration projects have been approved in 21 States and the District of Columbia.

COURT IMPROVEMENT PROGRAM

The Court Improvement Program provides funding to State courts to improve the

handling of foster care and adoption proceedings. The Court Improvement Program has

strengthened the focus on judicial decision-making and the role that courts play in attaining safe,

permanent homes for children.

ACKNOWLEDGMENTS

This Report reflects a great deal of effort by several staff members in the Office of Tax

Policy. Sonia Conly, John Eiler, Warren Hrung , and Allen Lerman bore the major responsibility

for analyzing the data and drafting the report. James Nunns, Director of the Individual Taxation

Division, Joel Platt, Director of the Revenue Estimating Division, and Donald Kiefer, Director of

the Office of Tax Analysis, supervised and reviewed the work. Leonard Burman, Deputy

Assistant Secretary (Tax Analysis) provided review and guidance. Lily Kahng and Frank

Toohey provided valuable review and consultation. Colleagues at the Internal Revenue Service

and the Department of Health and Human Services provided helpful input and review comments.

Karl Russo provided invaluable assistance in formatting and producing the final document.

Many other colleagues in the Treasury Department and other Departments and agencies provided

helpful review comments and suggestions.

Jonathan Talisman