Adoption Credit Increased, Made Refundable by Health Care Act

The Patient Protection and Affordable Care Act (PL 111-148) temporarily increased the adoption expense credit and fringe benefit exclusion limit for adoption assistance programs and made the credit refundable. The changes are effective for tax years beginning after Dec. 31, 2009.

The act increased the statutory maximum credit and exclusion amount from $10,000 to $13,170 and, starting in 2011, changed from 2001 to 2009 the base period for annual cost-of-living adjustments of the credit and exclusion amounts and their phaseout threshold. With inflation adjustment, the pre-Health Care Act credit and exclusion amount for 2010 would have been $12,170.

Before amendment by the Health Care Act, the adoption credit was a nonrefundable personal credit, with any unused credit available for carryforward for up to five succeeding tax years. The Health Care Act made the credit fully refundable in the year it is claimed. For a fuller description of the pre-Health Care Act credit, see “Tax Treatment of Adoption Expenses,” JofA, April 10, page 44. The act also redesignated the adoption credit’s section of the Internal Revenue Code from section 23 to new section 36C, to place it in the refundable credits subpart of the Code. The adoption assistance program fringe benefit exclusion remains in section 137.

Before amendment by the Health Care Act, the maximum credit had been scheduled to revert at the end of 2010 with the sunset of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA, PL 107-16) to $6,000 for special-needs children only, with no inflation indexing and no credit for non-special-needs children. The phaseout threshold likewise would have decreased, to $75,000 and also with no inflation adjustment. In addition, the adoption program income exclusion would have expired with the sunset because it had been extended by EGTRRA past its originally scheduled expiration at the end of 2001.

The Health Care Act delayed EGTRRA’s sunset with respect to the adoption credit and exclusion by one year, until the end of 2011. Therefore, unless Congress again extends the sunset or makes permanent the amendments made by EGTRRA and the Health Care Act, at the end of 2011, the adoption credit will revert to its pre-EGTRRA provisions (with no credit for non-special needs children), and the income exclusion will disappear.