Tax consequences of domestic and foreign child adoptions

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We favor Americans adopting American children from foster care when feasible, but current U.S. tax law benefits domestic and foreign adoptions.

The tax law enables adopters to replace American adoptees with foreign adoptees. As a result, Americans children are waiting longer than ever in foster care for their permanent families.

Section 23 of the tax code permits the child’s adopter to receive both the adoption credit and employer-provided adoption assistance benefits. Section 23 specifies qualified adoption expenses, child eligibility, limitations, and timing and filing requirements. IRS Topic 607 describes the general tax provisions. Form 8839 provides instructions.

Domestic and Foreign Adoptees

Section 23 applies to a potential adopter seeking to adopt a child. That adoptee can be an American child or a foreign child. Section 23(e) imposes timing compliance restraints for a foreign adoptee.

• A domestic potential adopter, seeking to adopt a U.S. child, can take into account the qualified adoption expenses the potential adopter paid before the year in which the adoption became final. The potential adopter can claim these amounts as a credit for the tax year following the year the potential adopter makes payment. The potential child adopter can claim these adoption benefits even though the potential adopter never finalizes the adoption, and even if the potential adopter never identified the child for the erstwhile adoption.

• The potential adopter of the foreign child can claim eligible expenses before the adopter undertakes its adoption effort or after the adoption. The adoption must be final before the adopter can claim the tax benefit.

Foreign Children

Undertaking a foreign adoption is not for the faint of heart. The prospective parent begins with the potential applicable transnational adoption process, the Hague Convention on the Protection of Children and Co-operation in Respect of Intercountry Adoption. Some 75 countries, including the United States, are members of the Hague Adoption Convention.

The prospective parent needs to ascertain whether the adoption is covered by the hague Adoption Convention procedures. Rev. Proc. 2010-31, 2010 I.R.B. 413, covers Hague adoptions. Rev. Proc. 2005-31, 2005 I.R.B. 26 covers non-Hague adoptions The U.S. Department of State’s Office of Children’s Issues issued an intercountry adoption guide, but it does not address the relevant tax adoption issues.

According to the State Department, at present 500,000 children are in the U.S. foster care system, while 115,000 children are waiting to be adopted. Dave Thomas’ Foundation for Adoption pegs the number of children waiting in foster care at 110,000.

The Hague Convention limits the child’s age to a 16-year maximum. The adopter must be married, or be an unmarried person at least 25 years of age. The adopter must certify to the child’s lack of infectious diseases. The convention does not require a comprehensive medical assessment.

Some countries use guardianship decrees as part of the adoption process. The State Department specifies that Islamic Family Law decrees might not meet the U.S. immigration law requirements. In many cultures, but not all, the adopter provides “gifts” for the child’s prior abode. The United States might treat the making of such gifts as bribe.

The United States government now plays an active role in the international adoption process. The intended adopter must secure approval from U.S. Citizenship and Immigration Services. This USCIS process focuses on the intended adopter, not on the child being adopted. This U.S. government process includes a home study about the adopter, together with detailed personal, financial and medical information about the family, plus personal references, proof of the adopter’s health, life insurance, fingerprint clearances, verification of employment and more.

The potential adopter needs to file Form I-600A for non-Hague adoption cases, requiring 12 pages of intrusive data and paying a minimum $775 fee. The adopter can file Form I-800A for Hague adoption cases, including 16 pages of more intrusive data and paying a minimum $775 fee. The adopter’s state of residence impacts this adoption process.

Foreign countries have their own adoption rules. Some countries permit single family adoptions; others don’t. The foreign country might require the adopter have a requisite revenue source, or might impose a religious test—an issue that our State Department avoids. A number of countries impose age requirements on the adopter. Nevertheless, the adopter needs to have a sense of fortitude and patience to proceed with the adoption process.

An adoptee must meet home country residence rules before the adoption process begins. If an adopter is seeking to adopt a child from a non-Hague country, this child must be an “orphan,” a term that has its own country-by-country definition. Hague Convention countries use the term “Convention adoptee.” The adoption process differs if the child’s birth parents as still living. The adopter must obtain a release under local law providing a legal and irrevocable release for adoption from these parents.

Applying U.S. immigration rules are difficult for the adopter, even if the adopter undertakes to apply the USCIS rules, foreign rules and state rules, and even if the adopter has legal custody of the child before securing full adoption. The adopter can apply for an IH-4 immigrant visa for a child from a Hague Convention country or apply for an IR-4 immigrant visa for a child from a non-Hague Convention country. The State Department encourages the adopter to secure U.S. citizenship for that child “as soon as possible.”

The U.S. imposes different visa rules if the adopter finally adopts the child abroad. The adopter can apply for an IH-3 visa for a child from a Hague Convention country or apply for an IR-3 immigration visa from a child from a non-Hague convention country.

International adoptions are extremely costly for the adopter. The potential adopter must run the gamut of both foreign adoption procedures and U.S. adoption procedures. We suggest that Congress suspend section 23 tax benefits until no children remain in the U.S. foster care system. America’s present international adoption system is too costly from a balance of payments standpoint, despite the child adopters’ laudable goals.

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