GOP Tax Plan Would Eliminate Adoption Tax Credit

The House Ways and Means Committee released details of the new Republican-led tax plan, which makes two significant changes that would lessen the benefits available to adoptive parents.

The first change is a complete elimination of the Adoption Tax Credit (ATC), a one-time tax benefit available for parents who adopt from foster care, internationally and through private domestic adoptions. The other is a tax exclusion for employer adoption assistance.

Here is a breakdown of the changes.

Adoption Tax Credit (ATC)

ATC was enacted in 1996, and the maximum credit is currently $13,570. The maximum value phases out starting at an adjusted gross household income of $203,540, and eligibility is capped at $243,540.

It is a one-time credit, but it can be applied over the course of five years.

“We are deeply concerned by the elimination of the adoption tax credit within the House Republicans’ tax reform proposal,” said the Adoption Tax Credit Working Group in a statement issued this week. “Billed as a framework to help American families, it does exactly the opposite by cutting a credit designed to help American families adopt children.”

The ATC is most frequently claimed by families that pursue international adoptions or private, domestic adoptions. The fees associated with those are substantial and, in general, the parents are from higher-income strata.

As ATC expert Becky Wilmoth wrote last year in The Imprint, there is not enough communication with adopters of foster youth that they are eligible as well. But even if there were better outreach, the credit as structured today would not help many of them. ATC is nonrefundable, which means that if you do not have any tax liability, there is no benefit to claiming the credit.

Unlike most (not all) private or international adopters, who tend to be higher income, most (but not all) families who adopt foster youth are of modest means.

In 2014, there were $355.1 million in ATC credits claimed on a total of 73,951 returns. Of that, 62 percent ($220.6 million) went to households making $100,000 or more. Only $19 million in credits went to households with income between $0 and $50,000.

This was not always the case. In 2009, the Affordable Care Act made ATC refundable for two years. So in 2010 and 2011, parents received a tax refund if their tax burden was below the maximum credit. When the credit was extended in 2013, Congress reverted it back to nonrefundable status.

During those two years, the average tax credit jumped from $4,000 to $11,000. Afterward, it went right back to $4,000.

Adoption advocates have pushed for a return to refundability, since helping lower-income adoptive families and encouraging individuals to adopt children from foster care were central goals of the ATC in the first place. Eliminating the credit entirely poses an obvious and major hurdle in the way of that.

If passed, it will be harder and more expensive for American families to adopt. For the children in the United States waiting to be adopted and brought into a loving home – the current proposal as it stands will make that much tougher to do.

The working group, a coalition of adoption and family-building advocates, attorneys and religious organizations, said in its statement the group “will do everything we can to fight this audacious proposal. There are too many children and American families at stake.”

YSI has not yet discerned the savings that would be reaped by the elimination of the credit. In the plan circulated by Ways and Means, it’s lumped in with several other eliminated credits that, according to the Joint Committee on Taxation (JCT), combine to increase federal revenue by $4 billion over 10 years.

Employer Assistance

The other change is easier to explain, and harder to politically fathom.

A small percentage of American employers offer adoption assistance as a benefit to employees. Generally, this includes some sort of financial assistance and paid leave time.

According to a 2015 report by the Society for Human Resource Management, about 7 percent of employers offer such a package. Most companies do not provide adoptive parents the type of assistance and leave they would for new biological parents.

Thus far, the value of this assistance has been excluded from the taxable income of an employee. The change proposed will simply make this assistance count for the purposes of federal income tax.

Projected 10-year savings from this move, according to JCT: “Less than $50 million.”

Within the framework of tax reform, it’s easy to understand how the current ATC might find its way into the mix. As 2010 and 2011 demonstrated, it has tremendous potential to assist lower-income adoptive families.

But as it is now, it mostly helps families that could get along without a tax credit. A better response to that than just scuttling it would be to lower the income threshold, make it refundable and target it at those families; but just as it stands today, the “tax credit for the wealthy” tag could play.

The employer assistance provision, on the other hand, is hard to fathom from a political standpoint. In order to gain somewhere between $0 and $50 million over 10 years, this plan cuts into a very small bit of help for a very small pool of families.

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