Love and Practicality: Adoption Financing
by Ellen Wilson, CPA, Chief Financial Officer
Gladney Center for Adoption
A couple's decision to build their family through adoption begins a lifelong journey. In addition to the hope, joy and anticipation, this decision brings with it many emotional and practical details to attend to along the way. Which car seat is safest? Which name will be best? What color to paint the child's room, how to decide on a pediatrician . . . and, how will we afford this?
Whether adopting domestically or internationally, expenses related to adoption can present a big hurdle to families. Fortunately, there are a growing number of resources available to families to help them manage the cost of adoption, including tax benefits, grants, employer assistance, and more.
The Federal Tax Credit1 is a good place to start for most families. This tax credit is available to most families for qualified adoption expenses. Everything from adoption fees, attorney's fees and court costs to travel expenses incurred as part of an adoption are covered. As long as the costs are "reasonable and necessary" and their principle purpose of for a legal adoption of a child under age 18, they can be included.
Unfortunately, the current adoption tax credit is scheduled to "sunset" on 12/31/2010. If legislative action is not taken this valuable benefit to families could expire. The Adoption Tax Relief Guarantee Act2 has been introduced in the Senate. If enacted, this bill would do two things; first, it would make the adoption tax credit permanent. Second, it would make the credit more family friendly. Currently, families are allowed to take the credit in the year the adoption is made final. The new bill would allow families to take the credit in the year expenses are incurred, which will ease the financial burden for many families.
2010 Federal Tax Credit
An expanded federal tax credit offers substantial assistance for families. Credits are much more valuable than deductions to most families because they come right off the top of the tax bill.
Like many tax credits, there is an income limit on the adoption credit. This information is updated or revised each year. For 2010 the limit is based on modified adjusted gross income (modified AGI).
Employer Assistance is more widely available than many people realize. A 2009 study by Hewitt Associates3 finds that more and more companies - of different sizes, industries and states - offer adoption benefits. While a recent survey by the Society for Human Resource Management found that the percentage of employers offering adoption benefits was down as a result of the economic downturn, growth over the past 20 years is impressive. The Hewitt study shows that in 1990 12% of companies offered adoption benefits, increasing to 51% in 2008. Nearly 60% of these companies extend benefits to part time employees.
Despite the increasing prevalence of adoption benefits, utilization is very low. Hewitt estimates that only about 0.1% of employees use the benefits each year.
Many employer adoption plans qualify under IRS Code section 137 as "adoption assistance programs," which means that employers can reimburse qualified adoption expenses free of federal income taxes.
The Federal Tax Credit and employer assistance can work together to help reduce the cost of adoption. Families may claim employer-provided assistance and the tax credit in the same year, provided they are used to cover different expenses. It is worth noting that "double-dipping" is not allowed. Families cannot take a tax credit for expenses that have already been reimbursed by employers.
Active-Duty Military Personnel4 may be reimbursed for up to $2,000 in qualified adoption expenses per adoptive child. Most of the costs covered by employers or eligible for the Federal Tax Credit would be covered under the military benefit, however, travel expenses are not covered. Reimbursement is made after the adoption is finalized and only if the adoption was done through a state adoption agency or a non-profit private agency. Additional assistance may be available for military families adopting a special needs child. Further, 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.
Adoption Grants are available through a wide variety of organizations. While grants rarely cover the entire cost of adoption, the appeal of a grant (versus a loan) is that it does not require repayment (although it is reported as income to the recipients). There are many grant organizations, some of whom offer need-based grants, others offer general adoption grants, a large number of organizations focus specifically on certain types of adoptions (international v domestic), or even on certain countries.
When looking into grants, families should consider the requirements the organization places on applicants, such as religious affiliation, adopting a special needs child, adopting internally, etc. It is also important to take into consideration the grant review process and submission deadlines.
In addition to the assistance and grant programs mentioned above, there are many other conventional financing avenues available for families including various types of loans, and assistance from religious and civic organizations.
Adoption is a journey of many steps. While the challenge of financing an adoption may seem significant, with a little legwork, families can find the resources that match their needs. With hearts that pull them forward, and practical steps along the way, families can make their dreams of adoption a reality.
1Like lots of things related to the US Tax Code there are specific requirements and details for families to consider. Detailed information on the tax benefits, is available in Publication 968 from the Internal Revenue Service.
2On Saturday, Nov. 21, 2009, the Adoption Tax Relief Guarantee Act, S. 2816, was introduced in the Senate by Senators Bunning (R-KY) and Nelson (D-NE). This is a bill to repeal the sunset of the Economic Growth and Tax Relief Reconciliation Act of 2001 with respect to the expansion of the adoption credit and adoption assistance programs and to allow the adoption credit to be claimed in the year expenses are incurred, regardless of when the adoption becomes final. The text of S. 2816 is set forth below:
S. 2816 Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE. This Act may be cited as the ``Adoption Tax Relief Guarantee Act''.
SEC. 2. REPEAL OF APPLICABILITY OF SUNSET OF THE ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001 WITH RESPECT TO ADOPTION CREDIT AND ADOPTION ASSISTANCE PROGRAMS.
Section 901 of the Economic Growth and Tax Relief Reconciliation Act of 2001 is amended by adding at the end the following new subsection:
``(c) Exception.--Subsection (a) shall not apply to the amendments made by section 202 (relating to expansion of adoption credit and adoption assistance programs).''
SEC. 3. ALLOWANCE OF ADOPTION CREDIT IN YEAR OF EXPENSES.
(a) In General.--Paragraph (2) of section 23(a) of the Internal Revenue Code of 1986 (relating to allowance of credit) is amended to read as follows:
``(2) YEAR CREDIT ALLOWED.--The credit under paragraph (1) with respect to any expense shall be allowed for the taxable year in which such expense is paid or incurred.''
(b) Effective Date.--The amendment made by this section shall apply to expenses paid or incurred in taxable years beginning after December 31, 2010.
3Trends in HR and Employee Benefits, Employer-Provided Adoption Benefits,; Hewitt Associates, November, 2009
4There are specific qualifications for reimbursement under the Military Adoption Reimbursement program including active-duty status, timing of reimbursement, qualified adoption agencies, etc. Details are available at