Financial Wellness Center


Jun 06, 2022

Financial Planning for Adoptive Parents

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 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 2022, up to $14,890 of qualifying adoption expenses paid or reimbursed by your employer are excludable from your income. However, income limits apply. For 2022, the exclusion amount is partially phased out for single and joint filers with modified adjusted gross income (MAGI) of $223,410 and is phased out completely for single and joint filers once MAGI reaches $263,410.

The federal adoption tax credit

When 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 2022, you can claim an adoption tax credit of up to $14,890 of qualified adoption expenses per eligible child, subject to the same income limits that apply to employer-provided adoption assistance.

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.

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.

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.

Some states also offer tax credits for families adopting children from the public welfare system.

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.

Retirement plan withdrawal

After you adopt a child, you may be able to take a distribution of up to $5,000 from an eligible defined contribution retirement plan or an IRA without owing the 10% early distribution tax that would ordinarily apply for a distribution made before age 59½. Your child must be under the age of 18 or physically or mentally incapable of self support. The distribution has to occur during the 1-year period beginning on the date on which you legally adopted your child. This distribution will be taxable, unless the money is recontributed to the plan. Note that not all retirement plans will permit qualified adoption distributions--check with your plan's administrator.

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.


Prepared by Broadridge Advisor Solutions Copyright 2022.


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