Tax Credit for Adoptive Families

The New Tax Credit for Adoptive Families

Application of the tax credit

The adoption tax credit bill became part of the small business/minimum wage conference bill passed by the House and Senate in August 1996 and was signed by the President later in 1996.

Some basic information: The tax credit will be effective as of January 1, 1997, and will be available for expenses incurred after that date. The credit will be $5,000 for finalized international adoption expenses, $5,000 for domestic adoption expenses, and $6,000 for domestic special needs expenses.

If the taxpayer's adjusted gross income is in excess of $75,000 there is a reduction in the credit allowed until $115,000 income where no credit is allowed.

The compromise agreement terminates the credit after 5 years, except for domestic special needs.

As passed in this conference bill, in addition to the tax credit provisions, the transracial placement provisions have also been agreed to, with some changes to the sanctions against states that do not comply with the provisions. The Indian Child Welfare-Act (ICWA) provisions are not part of this conference bill, and are expected to be considered separately.

Additional Information on the Adoption Tax Credit Legislation

ICWA Amendments: Placement of Native American children.
One part (Title III) of the original Adoption Promotion and Stability Act, HR 3286, had amendments to the Indian Child Welfare Act (ICWA); these amendments have been very controversial. The Senate Indian Affairs Committee has approved its own version of these amendments, and their bill (S. 1962) could pass on its own (as a free-standing bill) when the Congress returns for a month or so in September 1996.
S. 1962 would put a time limit on when a tribe can intervene in the adoption of a Native American child, but would also shorten the time frame in which birth parents can revoke their consent for an adoption. Further, the bill would require that tribes be informed if a child with Native American heritage might be placed for adoption, and would impose criminal sanctions if the child's heritage is willfully hidden. The bill appears to have support in the House as well as the Senate, but will no doubt continue to be controversial.

Transracial Placements
Another part (Title II) of HR 3286 concerned removal of barriers to transracial adoptions. This title concerned domestic adoptions and state law, and as such does not directly impact international adoptions. Along with the tax credit, this title has been incorporated into the small business conference bill.

Some of the information in this page was received from Maureen Evans, Director of JCICS
301-322-1906
If anyone would like a copy of the bill and report, please contact me.

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Federal tax break question
Greetings, can't find anyone who can give me the income breakdown of what income levels the $5000 federal tax break starts to drop off and at what income levels. Is there a chart I can get or do you have the numbers, need to makes some decisions soon to lesser my tax burden , this would be very helpful.. Thanks for any assistance you can give.
sd322@jps.net

Response
: The answer is a little complicated. This is what I was told by the IRS: You need to take your adjusted gross income. For example, if it's 80,000, you take the difference between 80,000 and 75,000. which is 5,000. You divide that by 40,000 and get .125. You multiply 80,000 by .125 and the deduction is reduced by $625, which means you get to deduct $4,375. If any of this makes sense to you, I'm glad. (There are also other things you have to subtract from your AGI, but they are such things as foreign income and some other things that most adopting parents will not have to worry about). For all other tax questions, please check with your tax professional or the IRS at 1-800-829-1040. BTW, I assume you know it goes into effect as of Jan 1, 1997, so it's not good for 1996 adoptions.