Sally Struthers, Uncle Sam and Tax Discrimination Against International Adoptions

Sally Struthers (of Archie Bunker fame) used to urge U.S. television viewers to sponsor a deserving child in another part of the world.  For a few dollars per month, a child could receive crucial healthcare! Food for the entire family! A new lease on life!  The sponsor would receive a photo of a sponsored child or perhaps even a letter from time to time.  It was, however, a decidedly distance relationship – i.e., sponsorship, not adoption.  Furthermore, the “sponsorship” of “a child” was not earmarked for any one particular individual, but rather for a charitable organization, so transfers qualified for an income tax deduction.

For Americans who adopt (not sponsor) children born outside the United States, some form of tax benefit has been available since 1997.  In 2010, the Patient Protection and Affordable Care Act (HR 3590) and the companion Health Care and Education Reconciliation Act of 2010 (HR 4872) made massive changes to the health care law and tweaked the adoption tax credit. For tax years 2010 and 2011, the adoption tax credit is $13,170.  It’s refundable, too.

Those bills became law in March, but I hadn’t focused on the changes to the adoption tax credit (changes to the tax law can be sneaky like that, popping up in all sorts of bills).  Until I taught tax credits in my basic Federal Income Tax class this semester, I hadn’t realized that adoptions of children who are U.S. citizens or residents are treated more favorably for income tax purposes than are adoptions of non-U.S. citizens or residents. 

Over-simply stated, a tax credit is available for expenses related to an international adoption only if the adoption becomes final, but the same finality rule does not apply to expenses for a U.S. adoption. 

What might be the policy reasons for this tax discrimination?  Is it because significant tax revenue is at stake?  According to U.S. State Department figures (see here), the number of international adoptions has increased steadily.  In 1999, there were 167,369.  In 2000, there were 18,477.  In 2001, there were 19,237.  (See here.)  If there were a correlation between completed adoptions and failed adoptions, one could make a rough estimate of the number of taxpayers who could have benefitted from an adoption tax credit, but for the fact they could not or did not finalize their international adoption.

Alternately, is the different tax treatment of U.S. and international adoptions just one more example of attempts to influence social policy through the tax laws?  Maybe, but I wonder whether tax credits factor significantly into a decision to adopt a U.S. citizen versus a non-U.S. citizen. 

Comments

[anonprof]

I received this credit a couple of years back after my spouse and I adopted a child from another country. I assumed the requirement that the international adoption be finalized was related to the greater possibility of fraud with international adoptions--ie, the difficulty of the IRS investigating a failed international adoption. But maybe I'm wrong.

[Tim Zinnecker]

"Over-simply stated, a tax credit is available for expenses related to an international adoption only if the adoption becomes final, but the same finality rule does not apply to expenses for a U.S. adoption."

My wife and I participated in a domestic adoption within the last few years. We could not claim the tax credit in the year of expenditure, but instead had to wait until a court finalized the adoption (which was in a different tax year). So I wonder if the quoted language might be wrong? Or maybe the tax laws changed in recent years? Or perhaps I misunderstood the eligibility of the tax credit?

[Bridget Crawford]

The law in this area is interesting (and complicated)! The instructions for Form 8839 (Qualified Adoption Expenses) are clear: "If the eligible child is not a U.S. citizen or resident, you cannot take the adoption credit or exclusion unless the adoption becomes final." In contrast, "[i]f the eligible child
is a U.S. citizen or resident, you can take the adoption credit or exclusion even if the adoption never became final." Curious. I think anonprof makes a good point about the anti-Madonna aspects of the law. If expenses relating to international adoptions gave rise to a tax benefit without regard to finality, it would be too easy to deduct leisure-based travel to international destinations, as long as the itinerary included a quick trip to the orphanage (or not). With respect to domestic adoptions, the law might be less insistent on finality because of lower barriers to audit.