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,, 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

adoptive parentsWhen 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.


Insurance issues

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.


Read Part 1 – Hav­ing the “Seri­ous” Talk 

Read Part 2 – Bud­get­ing for a Baby

Read Part 3 — Are You Going Back to Work?

Read Part 5 — Becom­ing a Step-Parent