This is a five part blog series focused on the financial aspects of having children. Specifically, the issues one should consider prior to bringing a child into a family. This is part four, Financial Planning Issues for Adoptive Parents. To read the first, Having the “Serious” Talk, click here. To read the second, Budgeting for a Baby, click here. To read the third, Are You Going Back to Work? click here. The last blog will be published next week.
What is it?
Adoptive parents need to be concerned with special financial planning issues that arise when a child is added to their family. These issues include paying adoption costs, understanding the income tax implications, and reviewing their insurance coverage.
How much does adoption cost?
Adopting a child can be expensive, but the cost varies. According to the Child Welfare Information Gateway, www.childwelfare.gov, the total cost of adopting a child can range from $0 to $40,000 (or more), and depends on several factors, including the type of adoption arrangement, the child’s age and circumstances, and whether the adoption is domestic or international. Adoption expenses may include:
- Fees paid to an adoption agency or attorney that arranges or facilitates the adoption
- Court costs
- Home study fees
- Travel expenses (domestic or international)
- Expenses for the birth mother, including medical and counseling expenses (these costs are regulated by state law)
Some expenses, such as court costs, apply in every type of adoption, while other expenses, such as expenses for the birth mother, apply only in certain types of adoptions. Ask the adoption agency representative or attorney to give you an accurate breakdown of what you’ll be expected to pay so that there are no surprises.
Paying adoption expenses
You may have to come up with thousands, or even tens of thousands of dollars to cover the cost of adoption, so it’s important to plan ahead. Have you saved enough money to pay the entire cost out of pocket? If not, you may need to come up with alternative ways to cover adoption costs. Here are some ideas:
- Take out a loan from a financial institution or a family member
- Look into adoption grants or loans–some private foundations and public agencies offer them
- Check with your employer to find out if adoption assistance is offered as an employee benefit
- Claim the federal tax credit for adoption expenses (if you’re eligible)
- Explore subsidies available through your state government or through the federal government (subsidies are often offered for adoptions through the foster care system)
Adoption assistance from employer
Some employers offer adoption assistance. If you’re lucky enough to work for an employer who offers this benefit, you may be able to recoup a portion of your adoption expenses tax free. Under federal rules, for 2014, up to $13,190 of qualifying adoption expenses paid or reimbursed by your employer (up to $12,970 for tax year 2013) are excludable from your income. However, income limits apply. For 2014, the exclusion amount is partially phased out for single and joint filers with modified adjusted gross income (MAGI) of $197,880 ($194,580 for 2013) and is phased out completely for single and joint filers once MAGI reaches $237,880 ($234,580 for 2013).
The adoption tax credit
When you file your federal income taxes, you may be able to claim a tax credit for expenses you paid to adopt a child. Because tax credits reduce your tax liability dollar for dollar, claiming the adoption tax credit is especially valuable. In 2014, you can claim an adoption tax credit of up to $13,190 ($12,970 in 2013) of qualified adoption expenses per eligible child, subject to the same income limits that apply to employer-provided adoption assistance.
Example(s): Ken and Sue adopted their baby on January 2, 2014. They paid more than $15,000 to arrange the adoption. Their income tax liability for 2013 is $14,000. However, because they’ll be eligible for a $13,190 adoption tax credit, they’ll only have to send the IRS a check for $810.
Generally, you can only claim a tax credit equal to your qualified adoption expenses, including reasonable and necessary adoption fees, court costs, attorney fees, traveling expenses while away from home, and other expenses directly related to the adoption. However, if you adopt a child with special needs, you can claim the entire tax credit, even if your actual adoption expenses are less.
Tip: If you’re eligible for both the federal adoption credit and tax-free adoption assistance from your employer, be aware that you can’t claim both a credit and a tax exemption for the same expense. However, you can apply both to the same adoption, as long as you’re applying them to different expenses. For example, if your adoption expenses total $10,000 and your employer reimburses you $9,000 through an adoption assistance program, you can claim an adoption tax credit of $1,000, assuming you meet other requirements.
Tip: Because the adoption tax credit is nonrefundable (unless you adopt a child with special needs), if you owe less in income taxes than the adoption tax credit amount, you will not receive the difference as a refund. However, the unused portion of the credit may be carried forward for up to five additional years to reduce your tax liability until the credit is used up. For more information, consult a tax professional.
Federal and state government subsidies
If you’re adopting a child through the foster care system (public agencies often place children with special needs), you may be eligible for a special federal or state subsidy or reimbursement for a portion of your adoption expenses. In some cases, all of your adoption expenses will be covered.
When you adopt a child, your insurance needs will change. One of your main concerns will be adding your child to your health insurance plan. Contact your health plan (or your company’s benefit representative if you have coverage through your employer) as soon as possible to find out how to enroll your child.
Keep in mind that if you haven’t yet joined your employer’s health plan, but are eligible to do so, you can enroll yourself, your spouse, and your new child in the plan, even if it’s not yet open enrollment season, because adoption is considered a special qualifying event. Generally, you’ll have to do so within a certain time period (under federal law, 30 days from the date the adoption is finalized, but your employer’s plan may give you more time). If you enroll your child within the applicable time period, your child’s coverage will be effective retroactive to the date of adoption.
Adopting a child is also a reason to review–and possibly increase–your life insurance coverage to better protect your family’s financial security. You’ll also want to make sure you have adequate disability coverage to provide income should you become sick or are injured and unable to work. A financial professional or an insurance representative can help you review your insurance needs.