The Adoption Tax Credit & Other Benefits for the Adoption Process

Finances
A happy mother holding the child she adopted with help from the adoption tax credit

Adopting a child is generally a lengthy, complex and emotional process. You likely have a lot on your mind, and taxes might not be at the top of the list. But since adopting a child can cost over $40,000, according to the U.S. Children's Bureau's Child Welfare Information Gateway, it's a good idea to maximize every possible tax benefit. Here, we cover some of the best resources available for people interested in adoption.

Initial Adoption Tax Credit

There's a tax credit available to help cover the initial costs of adopting a child. These costs generally include attorney fees, court costs, adoption fees and travel expenses incurred while going through the process.

In 2017, the maximum Adoption Credit was $13,570 per child. Your expenses up to this amount can be used to offset your tax bill. For example, if you owe $15,000 in taxes but have $10,000 in adoption expenses, your tax bill for the year will only be $5,000. If your total credit is more than your taxes owed, you can carry the unused amount to offset taxes in the future.

If you are trying to adopt a child within the U.S. (either a citizen or resident), you are eligible for the tax credit even if you do not complete the adoption. However, if you try to adopt a child from another country, you can only claim the credit if you complete the process.

Also, the adoption tax credit is only available if your income is below a certain amount. For 2017, it starts phasing out when your modified adjusted gross income (MAGI) — a special measure of your income the IRS uses to figure out whether you qualify for certain deductions — is over $203,540, and the credit is no longer available once your MAGI is over $243,540.

Potential Employer Support

Your employer could potentially be another source of financial support for the adoption. Some companies offer a lump sum payment to help cover fees or reimburse expenses from the adoption process. Others provide useful information and put employees in touch with quality agencies and adoption specialists.

If your company offers paid family leave, you could be eligible to take paid time off after adopting a child. Contact your HR department to see what support they could offer as you go through this process.

Tax Impact After Adopting a Child

After you adopt a child, you'll receive all the same tax benefits as other parents. First, you could be eligible for the Child Tax Credit. This credit offsets $2,000 worth of taxes and is available just for having a child. You can claim this credit as long as your child is younger than 17. However, for 2018, if you're single and earn more than $200,000 or are married and together earn more than $400,000, you will not earn the full credit as it phases out. For every $1,000 you earn over these income limits, your credit decreases by $50.

Adopting a child could also make you eligible for a larger Earned Income Tax Credit. The size of the credit and income cutoffs depend on how many children you have. For example, for 2018, if you are married and have no children, you only receive this credit if you earn less than $20,950 and will receive a maximum of $519. Once you have one child, the credit increases to $3,461, and you can claim it as long as your joint income is below $46,010.

If you pay for day care or a babysitter to take care of your child while you're at work, you could claim the Child and Dependent Care Credit to offset some of the expenses. You can claim up to $3,000 a year of expenses for one qualifying child, and up to $6,000 for two or more qualifying dependents.

Determining Whether You Can Afford to Adopt

Even with the tax benefits and possible employer support, adopting a child is an extremely expensive decision, and not one you'll likely want to make without reviewing all the financial implications. It's worth making sure you have enough to properly cover the initial expenses so you don't start off in debt after adopting.

From there, consider your annual budget to make sure you'll have enough per year after adding another member to you family. While your tax bill should be lower, you'll still have all the other expenses of raising a child.

It might be helpful to meet with a financial representative, especially one experienced with adoption financial considerations. They can help calculate your budget, make sure you qualify for all possible tax benefits and update your insurance policies as needed.

By going through this review and planning your taxes, you'll help put yourself in the best financial position to welcome your new family member. And if you do choose to proceed with the adoption process, best of luck!

IMPORTANT DISCLOSURES

1 Source: LIMRA, a life insurance industry association trade group, January, 2016
2 Source: U.S. Bureau of Labor Statistics (www.bls.gov)

Information provided is general and educational in nature. It is not intended to be, and should not be construed as, legal or tax advice. Western & Southern Financial Group and its member companies (“the Company”) does not provide legal or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. The Company makes no warranties with regard to the information or results obtained by its use. The Company disclaims any liability arising out of your use of, or reliance on, the information. Consult an attorney or tax advisor regarding your specific legal or tax situation.

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