Adoption is a life changing event that effects everyone in your extended family. It can be a joy filled process and it can be a stress filled process at the same time. Not the least of this stress will come from money concerns.
The cost of adoption varies greatly, starting around $5,000 to $40,000 or more depending on the type of adoption, with domestic adoptions topping the list. In this paper I'll look at a number of ways to obtain funds for your adoption, with a focus on the adoption tax credit through federal taxes.
Before delving into the tax credit let's look at several other ways to obtain the funds you need.
Savings: Having the money on hand to adopt is always a best-case scenario. However even with significant savings you may want to investigate other methods so you do not deplete your savings account.
Family members: Family can be a great help in your adoption, supplying everything from moral support to funds. If you have a good relationship with your family, asking for a gift or a loan can make a significant difference in affording your adoption.
Employee Benefit Programs: Many employers offer an adoption benefit program of up to $5,000 or more which can be a great help. In addition to the benefit of extra cash towards your adoption, you may be able to exclude up to $10,630 from your gross income if it is provided by your employer as an adoption benefit.
401(k) and other retirement plan loans: Many 401(k) plans allow you to borrow against your own investment. Do this with caution as borrowing money from your retirement plan can have far reaching effects on your retirement.
Home Equity Loans: Taking a loan out against your home is another option but as with borrowing from your retirement plan caution is advised. Research these options and make sure you're prepared to offset your losses.
Adoption grants: There are several organizations that exists which offer grants of up to $2000 or more towards adoption. Two such organizations are the Gift of Adoption fund (http://giftofadoption.org/) and the National Adoption Foundation (http://www.nafadopt.org/).
Adoption Loans: Several organizations also offer low interest loans for use in financing your adoption. the National Adoption Foundation (above) is one such organization. The Hebrew Free Loan Association (http://www.hflasf.org/) is another.
Personal Loan: Your bank may be willing to loan an amount of money to you as a personal loan.
Unsecured Line of Credit: A line of credit can certainly provide you with the money needed towards an adoption, however the interest rates are often high.
Fund Raising: Funds can also be gained by various fund raising methods such as garage sales, bake sales, raffles and many other ideas. A Child's Desire (http://www.achildsdesire.org/fundraising.htm) has some helpful tips on this.
Dependent Exemption: If you are providing for more than 50% of a child's needs, your child can be claimed as a dependent exemption on your taxes even if the adoption has not yet been finalized.
Active Military Adoption Benefit: If you are an active member of the US Armed Forces you can qualify for a reimbursment of up to $2,000 per child or $5,000 per family, per year. To qualify the adoption must be arranged through a non-profit agency.
State Adoption Tax Deduction: At this time there are fifteen states that offer an adoption tax deductions on state taxes. Arizona, California, Idaho, Iowa, Kansas Maryland, Massachusetts, Michigan, Missouri, New Mexico, North Dakota, Oklahoma, Utah, West Virginia and Wisconsin all offer tax deductions. Check your state tax laws or talk to a tax advisor for more information.
The Federal Adoption Tax Credit: The adoption tax credit is the primary way for most adopters to recoup money that has been spent on adoption. For 2006 the maximum amount that can be claimed is $10,960, a significant percentage of adoption expenses. For most adoptions you can claim a tax credit for the amount actually spent on qualified adoption expenses right up to that limit. If you adopt a domestic, waiting child you may take the complete amount of $10,960 immediately, regardless of how much the adoption expenses were. The tax credit may be taken in the year of the adoption for domestic adoptions or in the year the adoption is finalized for international adoptions.
In brief, qualified adoption expenses are adoption fees, court costs, attorney fees, traveling expenses (including meals and lodging), and other expenses directly related to the legal adoption of a child.
Expenses that do not qualify are expenses towards the adoption of the your spouse's child, surrogate parenting, expenses paid using funds provided by a federal, state or local government agency and anything that would be considered illegal.
If the full amount of your qualified adoption expenses cannot be claimed in one tax year (for instance, your tax liability is $2,500 but you spent $5,000 in qualified adoption expenses) you can carry the remaining adoption expenses forward for up to five years.
The adoption tax credit is more desirable than a deduction because you can subtract it dollar for dollar against your tax liability. As an example, if you owe $6,000 in Federal taxes and have spent $9,000 in qualified adoption expenses, your tax bill would be reduced by $6,000 and you would be able to carry an additional $3,000 of adoption expenses forward to the next tax year, where you can again claim them as a tax credit. This can mean a significant reduction in your tax liability and possibly a sizable refund.
The adoption tax credit is phased out for higher income tax payers. beginning at the adjusted gross income (AGI) of over $159,450 the adoption tax credit is reduced and is eliminated at the AGI of $199,450 or above. To determine how much of the adoption tax credit can be applied if your AGI is between $159,450 and $199,450 take the excess of your AGI over $159,450 and divide it by $40,000.
As an example, if a taxpayer has an AGI of $170,000 and has a qualified adoption expense of $4,000, they would subtract $159,450 from $170,000 for a total of $10,550. Then divide $10,550 by $40,000 to determine the percentage, in this case it's 26%. The tax payer would subtract 26% of their qualified adoption expense ($4,000 x .26) which would give them an available tax credit of $2,960.
The adoption tax credit can be claimed by filling out IRS form 8839 and submitting it along with form 1040 or form 1040NR. Report this credit on line 54 for the 1040 or on line 49 for the 1040NR. Form 8839 for tax year 2006 can be found at http://www.irs.gov/pub/irs-pdf/f8839.pdf. Instructions can be found at http://www.irs.gov/pub/irs-pdf/i8839.pdf.
What is the
future of the federal adoption tax credit? Congressman Ford of
Tennessee proposed a bill to the US Congress in 2005 to increase the
federal adoption tax credit to $15,000. This bill did not pass and
has yet to be resubmitted. For the tax year 2007 the adoption credit
has been increased to $11,390 and the modified AGI range for which
the benefit is phased out has been increased to $170,820 to
Internal Revenue Service Form 8839 - http://www.irs.gov/pub/irs-pdf/f8839.pdf
Internal Revenue Service Instructions for Form 8839 - http://www.irs.gov/pub/irs-pdf/i8839.pdf
IRS Tax Law Changes for 2007 - http://www.irs.gov/formspubs/article/0,,id=109876,00.html#exempt_2006
Exploring Adoption - http://adoptionblogs.typepad.com/adoption/2004/11/the_federal_ado.html
Adoption.com - http://www.adoption.com
Evan B. Donaldson Adoption Institute - http://www.adoptioninstitute.org/index.phpFeel free to Email Us us with any questions or concerns!
Check out Ben's other project, Arsgeek!