Financing Adoption Expenses

Federal Adoption Tax Credit

The federal government now offers an adoption tax credit of $10,000 to all adoptive families on qualifying expenses paid for a child's adoption. This tax credit is more valuable than a tax deduction because allowable expenses are subtracted dollar for dollar against your tax liability.

The $10,000 credit cannot be taken until tax year in which the adoption is finalized, however all expenses up to the limit related to the adoption are deductible whether they were incurred in previous tax years.  The credit is a per child limit, so if two children are adopted, the total federal income tax credit is $20,000 and so on.  Any unused income tax credit can be carried forward for five years.

Please read more about Tax Credit at www.irs.gov/taxtopics/tc607.html

State Adoption Tax Credit

Many states offer a tax credit or subsidy in addition to the federal tax credit. Ask your tax attorney about possible tax credits and/or tax deductions available to you from the state in which you are residing.

Dependency Exemption

Adoptive parents may take the same dependency exemption on their income taxes for their adopted children, and children placed with them for adoption but not yet finalized, as they would for their biological children. The exemption reduces their taxable income. The amount of the dependent exemption is adjusted annually to reflect the cost of living. The main point to remember is that families must provide more than half of their children's support to list them as exemptions. Some adopted children come with subsidies, which may provide more than half of their support. For example, if a child receives $5,000 a year in subsidies, the adoptive family must provide $5,001 or more a year to claim the child as an exemption.

Employee Benefits Programs

Roughly a quarter of the nation's employers offer some form of adoption benefits to their employees, according to a 1995 study. Benefits, typically available only to the company's "regular" employees, may include:

• direct reimbursement in the range of $2,000 to $10,000 upon actual placement (usually a flat amount designated for specific adoption expenses)
• paid leave, in addition to or including vacation time, sick leave, or personal days
• unpaid leave (personal, hardship, medical, or child care) (may range from 3 to 12 months)
• medical expenses of the birth mother
• adoption seminars and information classes, as well as counseling and support before and after placement

If you are a government employee, it's possible that additional adoption benefits may be available.

Even if your employer doesn't currently offer adoption benefits, ask about their availability. You may be able to persuade your company to begin offering them. Work with other employees interested in adoption, gather information for the employer, and present your case. Also, find out if your employer offers an Employee Assistance Program (EAP). This benefit was designed to help employees deal with dramatic personal situations or problems. Talking with an EAP counselor could help reduce the stress and anxiety that is so often a part of the adoption process.

(For more information about employer benefits, including materials to help you request that your employer establish a program, call the National Adoption Center at 1-800-TO-ADOPT.)

Federal Family and Medical Leave Act

Unpaid leave under the federal Family and Medical Leave Act also is an option. This act allows individuals to take up to 12 weeks off, unpaid but with benefits, without jeopardizing employment. The leave is not exclusively an adoption benefit since it is available for anyone who works for a company with 50 or more employees. However, it can provide valuable time for a newly adoptive family. Some states require employers to offer their workers a minimum amount of parental leave time.

Military Subsidies

The military will reimburse active-duty personnel for most one-time adoption costs up to $2,000 per child, whether adopting a healthy infant, a waiting child, or a child from abroad. Travel costs, foreign or domestic, are not covered. There is a maximum of $5,000 in a given year, even if both parents are in the military. Reimbursement is made only after the adoption is finalized and only if the adoption was done through a state adoption agency or a non-profit private agency. Fees that can be reimbursed include adoption fees; placement fees, including fees for birth parent counseling; legal fees and court costs; and medical expenses, including hospital expenses of the biological mother and her newborn infant.

A disabled adopted child also may be eligible for up to $1,000 a month in assistance under the military's Program for Persons with Disabilities. Furthermore, the military's Exceptional Family Member Program is designed to ensure that the adoptive families of children with special needs are assigned to duty stations where the child's needs can be met.

While the military has long provided free health care for adopted children, it is now available for children as soon as they are placed in your home, rather than having to wait until the adoption is finalized. Moreover, military health care does not require a waiting period for pre-existing conditions.

Military personnel also may make use of leave programs similar to those offered by civilian employers. Reimbursements and benefits apply whether the adopting parent is single or married and whether the adoption is completed in the states or overseas.

(For more information about adoption for military families, call the Adoption Exchange Association at 1-303-333-0845.)

Taxes on Assistance

Adoption assistance is exempt from taxation. Like child support that a custodial parent receives from a divorced spouse, adoption assistance is not considered as income. However, the level or amount of assistance may affect whether the child can be claimed as a dependent and be listed as an exemption on your income taxes. (Refer to the previous section titled "Dependency Exemption.")

Loans

While it's far from ideal to borrow money for an adoption, adoptive families may find a loan necessary to cover the large and immediate expenses. In some cases, you may be able to pay the loan back quickly once you receive a tax credit or are reimbursed by your employer or the military. Possible loan sources include:

• HOME EQUITY LOANS. Interest rates often are reasonable and the interest is tax deductible. Just remember, you're putting your home at risk.
• INSURANCE. You may be able to borrow from the cash value of your life insurance policy.
• LOW-INTEREST LOANS. Some banks offer low-interest loans or credit lines for adoptive parents.
• PRIVATE GRANT AND SPECIAL LOAN PROGRAMS. Adoption loans, both home equity and unsecured, may be obtained through the National Adoption Foundation. They also award grants to needy adoptive parents.
• RELIGIOUS ORGANIZATIONS.
• RELATIVES.

Two other possible sources prospective parents may be tempted to use for adoption expenses are credit cards and loans on retirement accounts, such as 401(k)s and profit-sharing plans. Credit cards are an easy source of cash, but typically charge high interest rates. Loans on retirement plans offer somewhat lower interest rates; however, if you lose or change jobs and cannot repay the loan within a short time period, the loan becomes a taxable withdrawal. In addition to income taxes you'll have to pay on the withdrawal, you'll also have to pay a 10 percent penalty if you're younger than 59 1/2. Most financial planners recommend that you not tap these sources unless it's absolutely necessary.

The decision on whether to take out a loan to help pay for adoption expenses can be difficult and has serious consequences for the entire family. It's important as adoptive parents to maintain financial stability for the good of the child. Dipping into future retirement savings or running up credit card debt can add to your financial stress and family stress in general, as well as throwing your long-term goals and planning off course.