Tax Benefits for Adoption

Many potential adoptive parents are discovering that adopting a child can put a serious strain on family finances. There are two tax benefits to offset the expenses of adopting a child: the adoption tax credit and an exclusion from income of benefits under an employer's adoption assistance program.

Adoption tax credit

The income limit on the adoption tax credit is based on modified adjusted gross income (MAGI) and is gradually phased out depending on income.

The maximum adoption credit for 2010 is $13,170 per adoption attempt and is refundable.

Adoption tax exclusion

Parents who work for companies with an adoption assistance program also get a tax break. Parents can receive up to $13,170 in reimbursement from their employer for adoption expenses without paying taxes on that benefit. However you can not double-dip. You can't take a tax credit for adoption expenses reimbursed by your company.

Qualifying adoption expenses are reasonable and necessary adoption fees. Traveling expenses while away from home and other expenses directly related to, and whose principal purpose is for the legal adoption of an eligible child.

For domestic adoptions, you can claim the credit for adoption-related expenses in the year the adoption is completed. If the adoption is not, you can claim the credit the following year.

For more information on the adoption tax credit and exclusion, visit www.irs.gov or contact a local accountant to discuss how these options may help you offset your adoption expenses.

Employee Benefits Program

• Reimbursement of $2,000-$10,000 for specific adoption expenses
• Paid leave (in addition to or including vacation, sick leave or personal days)
• Unpaid leave
• Medical expenses of the birth mother
• Seminars, classes and/or counseling and support before and after placement

If an employer does not currently offer adoption benefits, families should ask about their availability and may be able to persuade their company to begin offering them. Families should also work with other employees interested in adoption, gather information for the employer and present it to their employer. Employers may also offer an Employee Assistance Program (EAP). This benefit was designed to help employees deal with dramatic personal situations.

For more information about employer benefits, including materials to help request that an employer establish an adoption assistance program, call the National Adoption Center at 1-800-TO-ADOPT or contact the employer's corporate human resource department about the availability of benefits.

Federal Family and Medical Leave Act

The federal Family and Medical Leave Act allows for up to 12 weeks off, unpaid but with benefits, without jeopardizing employment. The leave is not just an adoption benefit since it is available for anyone who works for a company with 50 or more employees. Some states require employers to offer their workers a minimum amount of parental leave time.

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.

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. For more information, call the Adoption Exchange Association at (303) 333-0845.

Adoption Loans

While it is 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, families may be able to pay the loan back quickly once they receive a tax credit or are reimbursed by their employer or the military. Possible loan sources include:

• Adoption Loans - some banks offer special rates and incentives for loans for adoption.
• Home Equity Loans - Interest rates often are reasonable and the interest is tax deductible.
• Insurance - Families may be able to borrow from the cash value of their life insurance policies.
• Low Interest Loans - Some banks offer low-interest loans or credit lines for adoptive parents.
• Private Grants - Contact the National Adoption Foundation at(203) 791-3811 for information on their adoption grant program for needy families or search the web for other adoption grant opportunities. [**CAUTION: Reputable grant organizations do not require you to pay upfront fees for grant monies. Small application fees may be required, but any reputable organization would not charge significant amounts.]

Other Sources

Two other possible sources prospective parents may use for adoption expenses are credit cards and loans on retirement accounts, such as 401(k) plans 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 that person were to lose or change jobs and cannot repay the loan within a short time period, the loan becomes a taxable withdrawal. In addition to the income taxes the individual will have to pay on the withdrawal, they will also have to pay a 10 percent penalty if they are younger than 59 1/2.