From Foster Care to Forever Families? How Does the Federal Adoption Tax Credit Affect Adoptions?

The Federal Adoption Tax Credit, introduced in 1997 to promote foster care adoption, became refundable for two tax years only, 2010 and 2011. This sudden change significantly decreased the cost of adoption for certain families. During these two years, families could receive any credit in excess of their tax liability as a refund, up to the maximum credit amount of about $13,000. In a recent study, Margaret Brehm (Oberlin) asked how this change affected adoptions from foster care.

The refundable credit is costly; it more than quadrupled federal expenditures on the credit in 2010. Did the refundable credit result in new foster care adoptions, due to the reduced cost of adoption, or merely change the timing of adoptions, with families attempting to claim the refundable credit while it was available?

Using data on all adoptions from foster care from 2000–2015, Brehm finds a substantial increase in adoptions at the end of tax year 2011, when families would soon lose the opportunity to file for the refundable credit. Brehm estimates that there were about 44 percent more adoptions in December 2011 than there would have been had the refundable credit not expired. The results indicate the tax credit likely affected both the decision to adopt and the timing of adoption, with adoptions moved forward by up to six months.

This work provides insight into how financial incentives, particularly those in the short run, affect adoption. If the program is costly, is it worth it? Brehm: “From a policy perspective, the refundable adoption tax credit is relatively cost-effective if it induced at least 1,200 more foster care adoptions. Children adopted while the tax credit is refundable are more likely to be older and more likely to receive an adoption subsidy, suggesting the benefits of the refundable credit accrue to adoptions of greater need.”

Read the study in the Journal of Human Resources: “Taxes and Adoptions from Foster Care: Evidence from The Federal Adoption Tax Credit,” by Margaret E. Brehm

Margaret Brehm is an assistant professor of economics at Oberlin College.