The Inequitable Tax Benefits of Adoption

This Comment examines the two provisions of the Internal Revenue Code under which taxpayers may defray expenses incurred in adopting a child.First, under Internal Revenue Code § 137, taxpayers may exclude from income qualified adoption expenses paid or reimbursed by the taxpayer's employer pursuant to an adoption assistance program.There is no benefit gap under the exclusion-from-income provision; the value is identical to taxpayers regardless of income.Second, under Internal Revenue Code § 23, an adoptive family receives a credit against tax liability to help discharge adoption-related expenses.Because this credit only discharges positive tax liability, only higherincome taxpayers are fully benefitted by the credit.Taxpayers without sufficient tax liability in the current year may carry forward unused portions of the credit for up to five years.However, simple present value analysis shows that, by carrying forward unused portions of the credit, these families receive less of a benefit than do families with higher income who are able to immediately claim the full credit.This benefit gap increases as family income decreases.Families without tax liability are not benefitted by the adoption credit.The amount of the adoption credit is indexed annually for inflation, but this indexation only increases the benefit gap between higherand middle-income taxpayers.This Comment proposes multiple solutions to the current inequitable tax benefit paradigm, and it ultimately proposes a † After this Comment was selected for publication, but before it could be printed, Congress significantly changed the adoption tax credit.These changes are contained within the "Patient Protection and Affordable Care Act," Pub.L. No. 111-148, signed into law on March 23, 2010.See H.R. 3590 § 10909, available at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h3590enr.txt.pdf.Importantly, because the adoption tax credit is now refundable, the economic loss that resulted from carrying unused portions of the credit forward will no longer occur.Consequently, much of the analysis contained in this Comment is now outdated.Notwithstanding these changes, the Liberty University Law Review believes this Comment offers an important contribution and has determined that publishing it is appropriate.