Is the Assistance we get for our adopted children taxable?

NACAC | Adoption Subsidy

Tax Issues Related to Adoption Assistance and Adoption

Adoptive parents often ask whether adoption assistance (adoption subsidy) payments are taxable. Many also wonder about claiming their child as a dependent and using the child tax credit. NACAC reviewed related IRS publications, and below we offer our interpretation of these issues. Please know that NACAC is not a tax expert, and these opinions should not be considered legal or financial advice. You should consult your own tax advisor before filing.

Adoption Assistance Payments as Taxable Income

Since 1974, the IRS has ruled that adoptive parents do not normally need to include adoption assistance benefits in their taxable income (see box below for specific IRS language).

IRS Publication 17: Your Federal Income Tax

Publication 17 has made two references related to the taxability of adoption assistance:

* Chapter 12: Other Income—Welfare and Other Public Assistance states “do not include in income the benefit payments from a public welfare fund” (p. 84). In 1974, the IRS ruled that adoption assistance benefits were public welfare payments and thus exempt from taxation under this clause.
* In a previous version of Publication 17, the IRS specifically stated “do not include in your income payments from a state agency to help you care for your adopted child” (p. 67 of the 1986 Publication 17).

However, the IRS also says that adoption assistance benefits may be taxable if they exceed the amount an adoptive family spends to support the child. This situation might occur if adoption assistance was a family’s sole source of income. In cases such as this, some of the adoption assistance funds are used to meet the needs of the parent(s), so not all funds are being spent to support

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