The federal government supports adoption in two primary ways: federal grants to state governments and tax benefits for individual taxpayers that help offset the costs of adopting a child. This report focuses on federal adoption tax benefits, which consist of an adoption tax credit and an income tax exclusion for employer-provided adoption assistance. This report provides an in-depth overview of these tax benefits. It is structured to first provide a brief summary of adoption in the United States, including the number of adoptions and the average cost of adoption. The report then turns to a detailed description of the adoption tax credit and the exclusion for employer-provided adoption assistance, including a summary of administrative data on the adoption credit (similar data on the exclusion are unavailable). Next, the report summarizes the legislative history of these tax benefits. Finally, the report concludes with a discussion and analysis of potential policy options related to these benefits. Adoption is a social and legal process in which an adult is formally made the parent of another individual (usually a child). The legal process in adoption generally requires that a court terminate the parental rights and responsibilities of birth parents (or earlier adoptive parents) and subsequently grant those rights and responsibilities instead to the adoptive parents. For the purposes of understanding adoption tax benefits, adoption can be categorized in one of three ways: 1. Domestic public agency adoption: An adoption facilitated with the involvement of a state child welfare agency. (Note that most domestic public adoptions are special needs adoptions, discussed subsequently.) 2. Domestic private adoption: An adoption facilitated by a private agency, adoption facilitator, or attorney. 3. Intercountry or foreign adoption: An adoption of a noncitizen or nonresident child by families who are citizens or legal residents of the United States. Data on adoption indicate that approximately 120,000 children were adopted in the United States in 2012. Of these adoptions, 44% where domestic public agency adoptions, 49% were domestic private adoptions (including stepchild adoptions), and 7% were international adoptions. These same data indicate that 49 per 100,000 adults became adoptive parents in 2012. Overall, the total number of adoptions has fallen between 2001 and 2012 as illustrated in Figure 1 , largely driven by a steep decline in foreign adoptions. The number of domestic public agency adoptions has been stable over the past decade, between approximately 50,000 and 57,000 children a year. The number of domestic private adoptions has fallen from about 70,000 per year in 2001 to 60,000 per year in 2012. (This figure includes stepchild adoptions, which do not qualify for adoption tax benefits. Notably, while data on the number of stepchild adoptions as a share of domestic private adoptions are unavailable, it is believed that they comprise a significant proportion of this type of adoption.) Finally, foreign adoptions have declined between 2001 and 2012 from approximately 20,000 per year to approximately 9,000 per year. Adoption costs vary widely, depending on the type of adoption and the particular circumstances of each adoption. However, the Department of Health and Human Services (HHS) has estimated cost ranges for different types of adoption as follows: Domestic public agency adoptions: $0 to $2,500 Domestic private adoptions: $15,000 to $45,000 Intercountry adoptions: $20,000 to $50,000 Actual adoption costs may be higher depending on the particular circumstances of the adoption. The adoption tax credit helps qualifying taxpayers offset some of the costs of adopting a child. Although the credit may be claimed for nearly all types of adoptions (excluding the adoption of a spouse's child), there are some special rules related to claiming the credit for intercountry adoptions and for adoption of children with special needs. In 2018, taxpayers may be able to receive an adoption credit of up to $13,810 (this amount is annually adjusted for inflation). The credit is reduced for taxpayers with income over $207,140 and is phased out completely for taxpayers with more than $247,140 in income (these amounts are subject to annual inflation adjustment). The adoption credit is not refundable. However, the credit may be carried forward and claimed on future tax returns for up to five years after initially claimed. The eligibility rules and calculation of the credit are described in detail below. Before calculating the credit the taxpayer can claim for a given year, the taxpayer must determine whether the child being adopted (or in the process of being adopted) is eligible, and the amount of qualifying expenses to which the credit can be applied. A taxpayer can only claim expenses related to the adoption of an eligible child. The term eligible child refers to children under age 18 and to older individuals who are physically or mentally incapable of taking care of themselves. Qualifying expenses must be directly related to the adoption of an eligible child. They include reasonable and necessary adoption fees, court costs, attorney fees, travelling expenses while away from home (including amounts spent on meals and lodging), and other expenses directly related to and for the principal purposes of the legal adoption of an eligible child by the taxpayer (e.g., home study costs). Qualified adoption expenses do not include any expense for which a deduction or credit is allowed under any other provision of the tax code; funds for adoption expenses that are received under any federal, state, or local program; expenses incurred to carry out any surrogate parenting arrangement; expenses incurred in connection with adopting a spouse's child (i.e., a stepchild); or adoption expenses reimbursed under an employer program. Taxpayers cannot claim a credit for expenses that violate federal or state law, are incurred in carrying out any surrogate parenting agreement, or are for the adoption of a child who is the child of the taxpayer's spouse, though they may be able to claim expenses for the adoption of a child of a domestic partner (see shaded textbox). To claim the adoption tax credit, a taxpayer must file IRS Form 8839 and include the name of the adopted child (if known), their age, and the child's taxpayer identification number (TIN). In most cases, the child's TIN is their Social Security number (SSN). However, in cases where the adopting parents do not have or cannot obtain the child's Social Security number, they may be able to use an adoption taxpayer identification number or ATIN. If the child's name, age, and TIN are not provided, the IRS may disallow the credit until additional information about the adopted child is provided by the taxpayer. In addition, a married couple generally must file a joint tax return to claim the adoption tax credit. If two taxpayers who are registered domestic partners adopt a child together, they may split the qualified expenses and the resulting credit by mutual agreement, but the total amount of the credit that can be claimed for a given adopted child is still subject to the same limit ($13,810 in 2018). For domestic adoptions that are not yet finalized, taxpayers may claim qualifying expenses for the credit in the year following the year the expense is paid. This means that the taxpayer may claim the adoption tax credit for expenses paid even if a domestic adoption is never finalized. Expenses paid in the year an adoption is finalized can be claimed on that year's tax return. Expenses paid after an adoption is finalized can be claimed the year the payment is made. In contrast, as illustrated in Table 1 , some of these timing rules differ for adoptions of foreign children. Specifically, for adoptions of foreign children, any expenses paid before the adoption is finalized can only be claimed in the year the adoption is finalized. If a foreign adoption is never finalized, the taxpayer cannot apply any expenses connected to that adoption attempt toward the credit. As with domestic adoptions, expenses incurred after a foreign adoption is finalized can be claimed the year they are paid. In 2018, the maximum amount of the credit is $13,810 per child. The maximum adoption tax credit that can be claimed in a given year, per eligible child, is equal to the lesser of (1) qualifying adoption expenses that can be claimed in that year (see the discussion of timing in the preceding section) or (2) the maximum statutory amount of the credit per child. The maximum statutory amount is annually adjusted for inflation. If the child is a special needs child, the credit amount is always the maximum statutory amount per child , irrespective of the actual expenses incurred. (The definition of a "special needs" adoption is discussed subsequently.) The maximum aggregate amount of the adoption tax credit that the taxpayer can claim on their tax return equals the sum of the credit amounts for each eligible child. The maximum amount of the credit a taxpayer can claim in a given year may differ from the actual amount the taxpayer does claim in that year for two reasons: 1. Income Limitation: The maximum credit amount per adopted child (i.e., $13,810 in 2018) is reduced because the taxpayer's income is above the statutory income limitation (i.e., the maximum credit amount is phased down). 2. Nonr efundability /Carryforward : The taxpayer's tax liability is smaller than the amount of the credit the taxpayer can claim in a given year. Since the credit is nonrefundable, the amount of the credit actually claimed in a given year by definition cannot be greater than taxes owed. Hence, in cases where the calculated credit is greater than the taxpayer's tax liability, the actual credit he or she will be able to claim will be equal to their tax liability. For the purposes of the adoption tax credit, the value of the credit in excess of tax liability can be "carried forward" and claimed on future tax returns. Theoretically, both limitations may apply to the same taxpayer. In practice, however, higher-income taxpayers will more likely be subject to the first limitation, while lower- and middle-income taxpayers are more likely to be subject to the second limitation.