Federal taxes have two purposes: raising revenue to provide services for the entire nation and influencing the behavior of citizens. Adoption tax benefits are an example of the second purpose. The government wants to encourage citizens to grow their families, and adoption is a wonderful way to do that. For that reason, the U.S. government wants to encourage adoption and therefore offers tax benefits to people who adopt. We’ve talked before about the Adoption Tax Credit. There is another adoption tax benefit: the non-recurring adoption expenses benefit.
The non-recurring adoption expenses benefit
Since 1986, the government has reimbursed up to $2,000 of non-recurring expenses like psychological or medical exams, legal costs, and other one-time expenses related to the adoption of special needs children. This is for people who adopt a special needs child whose biological parents have terminated their parental rights. These children are legally available for adoption, but realistically they are less likely to be adopted than other kids.
The adoption of a group of siblings or a child with mental illness may be more expensive and complicated than other adoptions. In order to make it more accessible for families to make the choice to adopt these children, the government provides financial assistance in the form of a tax credit. The non-recurring adoption expenses benefit is only for expanses not already reimbursed by the Adoption Tax Credit.
A family planning to adopt a special needs child must make an agreement with the government before the adoption in order to receive the funds. The state provides the funds and the federal government reimburses half of the states’ costs, up to $1,000.
Who is eligible?
This refundable tax credit is specifically for children defined as having special needs. What this means in this context is that the children are in groups that are hard to place for adoption. This can include kids with medical issues, sibling groups intending to stay together, or children who are older than the easily adopted babies and toddlers.
These children do not need to come out of foster care. A private adoption of a child with severe physical or emotional needs, teen, or any other eligible child can also qualify for this assistance. however, these children often do come from the foster care system. The sad truth is that kids who are not quickly adopted from foster care may stay in the system until they age out of foster care, never having had a permanent loving home.
The credit is intended to cover additional expenses that these special-needs kids may have, in addition to the usual adoption costs.
Is $2,000 enough?
A review is currently underway. As mentioned above, the reimbursement has been capped at $2,000 since 1986. The spending power off $2,000 in 2026 is much different from what it was in 1986. The Office of Human Services Policy has just released a report reviewing this tax benefit. In it they estimate that the benefit would need to be increased to nearly $6,000 to cover as much of the expenses of special needs adoption as it did in the 1980s.
The Office recommends increasing the cap, pointing out that fewer children are currently in foster care, so the cost of the program would not increase excessively. While about 25% of kids in foster care are eventually adopted, and that percentage is about the same as in the 1980s, the total numbers are smaller. The Office of Human Services Policy thinks that, given the smaller numbers involved, the cap could be raised. That would make the funds go further now.
Not everyone takes this opportunity
The report also points out that many adoptive parents of special needs kids don’t take advantage of the non-recurring adoption expenses benefit. Many people believe that it is only available to those who adopt a child from the foster system, or do not realize that “special needs” in this context can refer to a healthy 5-year-old with no medical issues.
If you are planning to adopt a child who might fit the definition of “special needs” for this credit, make sure you discuss the possibility with your tax professional.
Questions about adoption? Ask Heimer Law. We’re specialists in adoption.
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