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Adoptions at H&C
The following represents Holt's current understanding of the major features of the newly enacted Adoption Tax Credit. This summary is not a complete nor exhaustive description of all of the provisions of the tax credit. This summary should not be regarded as a substitute for professional legal or tax advice. The validity of the following information may change, subject to: implementing regulations issued by the Internal Revenue Service, changes in the law, and judicial construction.
Holt strongly recommends that adoptive families consult a legal or tax professional to learn whether and how they may qualify for the Adoption Tax Credit.
(Signed into Public Law 107-16 on June 7, 2001)
What is the Hope for Children Act?
The Hope for Children Act (H.R. 622) is legislation which increases the adoption tax credit to $10,000 for all adoptions and increases the employer adoption assistance exclusion to $10,000.
What is the current status of this legislation?
The Hope for Children Act is now public law which will take effect beginning in January 1, 2002. H.R. 622 was incorporated into the historic tax relief bill signed by President Bush. It is Title II, Section 202 of H.R. 1836, the Economic Growth and Tax Relief Reconciliation Act. The Hope for Children Act was signed into Public Law 107-16 by President Bush on June 7, 2001 at a White House ceremony.
Who introduced the Hope for Children Act in the House and the Senate?
The legislation was introduced in the House of Representatives on February 14, 2001 by Rep. Jim DeMint. The bipartisan Hope Coalition [Rep. Jim DeMint (R-SC), Rep. Jim Oberstar (D-MN), Rep. Spencer Bachus (R-AL), Rep. Peter King(R-NY), and Rep. Deborah Pryce (R-OH)] worked to ensure the enactment of H.R. 622 into law. The House bill mirrored the Hope for Children Act introduced in the Senate (S. 148) on January 23, 2001 by Sen. Larry Craig (R-ID) and Sen. Mary Landrieu (D-LA).
Why was the Hope for Children Act needed?
Many families who would like to open their home to a child are prevented or delayed in doing so by the high cost of adoption. Families can spend anywhere from $8,000 to $30,000 to adopt a child. We would like to help ease this financial burden to ensure that children quickly find a permanent, loving home.
Why was this matter so urgent?
For non-special needs adoptions, the current $5,000 tax credit expires this year. The current $5,000 exclusion for employer-provided adoption assistance also expires.
When will families be able to claim the $10,000 credit?
Families will be able to claim the $10,000 tax credit for qualifying adoption expenses beginning with expenses which occur in 2002. Some will be able to claim these expenses on their 2002 tax return.
Will a family be able to claim the full credit by spreading it over multiple years?
Yes, the credit can be applied against tax liability over five years or, beginning in 2002, whenever the family reaches the $10,000 cap, whichever occurs first.
What about expenses incurred prior to 2002?
The Internal Revenue Service Publication which will clarify the transition from the $5,000 tax credit to the $10,000 tax credit is not expected to be published prior to December 2001. The $10,000 credit will only apply to expenses incurred in 2002 and thereafter. Expenses incurred prior to 2002, regardless of the year in which the taxpayer is supposed to claim the expenses, will be subject to the $5,000 cap, unless they are legally considered incurred in 2002.
What are considered 'qualifying adoption expenses'?
The Internal Revenue Service outlines 'qualifying adoption expenses' as "reasonable and necessary adoption fees, court costs, attorney fees, traveling expenses (including amounts spent for meals and lodging) while away from home, and other expenses directly related to, and whose principal purpose is for, the legal adoption of an eligible child."
Will a $10,000 tax credit be enough?
The Hope for Children Act is a healthy start to ensuring more children find a loving home. While some adoptions will cost well over $10,000, raising the limit will aid more families in their efforts to adopt a child in need. The Hope for Children Act is indexed for inflation to ensure that the tax credit and income limitations continue to rise alongside the cost of living. Additionally, the full credit can be claimed for adjusted gross income (AGI) up to $150,000, and is gradually phased out for incomes between $150,000 - $190,000. The tax credit is exempted from the Alternative Minimum Tax.
Do inter-country adoptions qualify for the adoption tax credit?
The Hope for Children Act applies to all adoptions - both domestic and inter-country. Like current law, in order to claim the tax credit for inter-country adoptions, the adoption must be finalized. For IR-3 visas, finalization usually occurs abroad. For IR-4 visas, finalization usually occurs in the United States.
How does the Hope for Children Act affect special needs adoptions?
The $6,000 adoption tax credit for special needs children is permanent law. However, the tax credit can only be utilized for qualified adoption expenses. While most special needs adoptions are from public agencies and do not have these up-front, 'qualified' costs, the adopting families face other challenges in opening up their home to special needs children. Thus, the Hope for Children Act provides a flat $10,000 credit for special needs adoptions to help families with one-time and ongoing costs such as mental health counseling, physical therapy and medical costs, transportation costs, and home modifications to accommodate wheelchair ramps or large sibling groups. States have their own definitions of special needs children and use determining factors such as the child's age, ethnic background, siblings, and mental, physical or emotional handicap. Note: While families adopting children with special needs can claim $10,000 in qualifying expenses beginning in 2002, they cannot claim the $10,000 flat credit until 2003.
How does the employer adoption assistance exclusion work?
Under current law which is set to expire this year, up to $5,000 in adoption assistance provided by an employer may be excluded from an employee's taxable income. The Hope for Children Act would raise the exclusion amount to $10,000 and make it permanent law. The exclusion would parallel the tax credit in all forms.
What was the estimated cost of this legislation?
The Joint Committee on Taxation estimates the Hope for Children Act will keep $3.15 billion in taxpayers' hands over 10 years.
How does the Adoption Tax Credit honor Tom Bliley?
Former Representative Tom Bliley was the original author of the Hope for Children Act. He is an adoptive father and, as Chairman of the House Commerce Committee and Co-Chairman of the Congressional Coalition on Adoption, was a tireless advocate for adoption. Despite gathering 280 House cosponsors in the 106th Congress, the Hope for Children Act was not signed into law prior to Chairman Bliley's retirement. While the law does not officially name the tax credit in honor of Tom Bliley, families across the nation are encouraged to refer to the adoption tax credit as the Bliley credit to commemorate Tom Bliley's commitment to adoption.
Who should I contact for clarification on my particular tax credit scenario?
Contact the Internal Revenue Service at 1-800-829-1040 with your specific questions.
The IRS Publication 968 is available via the IRS website at
http://www.irs.ustreas.gov and provides a step by step guide to the current $5,000 tax credit, which will be a model for the new $10,000 adoption tax credit.
PLEASE NOTE: This information is provided as a general guideline on the new provisions of the adoption tax credit. It should not be used as a definitive source of information for individual case scenarios. The appropriate agency of the U.S. Government (e.g. the Internal Revenue Service or the Immigration and Naturalization Service) should be able to answer specific questions on the implementation of the Hope for Children Act.
If you have already tried reaching the IRS or INS and have inquired with your adoption agency or legal representation and still are unclear on particular provisions, your local U.S. Representative may be able to make an inquiry on your behalf. You can verify your U.S. Representative by going to the "Write Your Representative" section at the bottom of the U.S. House of Representatives Web site at
http://www.house.gov.
For more information, please refer to the
IRS's Website
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