Federal and some state governments now offer a number of benefits or reimbursements for some adoption costs. Federal laws also require employers that provide health insurance to give the same insurance to newly-adopted children.
Don't forget to ask local adoptive parent groups for suggestions for covering adoption expenses. They may have devised good ways to finance adoptions. In addition, they are probably aware of state adoption benefits as well as benefits offered by many employers in the area.
Thanks, Uncle Sam!
The federal government gives adopters a big break in the form of an income tax credit of $10,160 for adoption expenses. If you adopt two children, then you can take double the adoption expenses as a credit, or up to $20,320. (Assuming you spend at least that amount to adopt the children, if they are not foster children.) And if you adopt three children … well, you do the math. The adoption tax credit can be applied to all allowable expenses, which include agency fees, attorney fees, court costs, travel (including meals and lodging), medical expenses for the birthmother, and other fees related to the adoption. Expenses that are not allowed under this law are expenses for stepparent adoptions or surrogate parent arrangements. The adoption must also comply with federal and state laws.
If you adopt a child from foster care and your adjusted earnings don't exceed $152,000, you're entitled to a $10,160 tax credit, even if you don't incur any expenses. Congress enacted this credit to encourage people to adopt foster children.
In addition, you may also be eligible for a monthly subsidy payment and Medicaid medical benefits for the child. Subsidy programs have increased considerably in the past several years, as states have worked hard to place children for adoption. State social workers can provide more information on subsidy programs.
Not everyone is eligible for the tax credit. If your adjusted income is over about $152,000, it disappears altogether. For more information, ask the IRS for Publication 968, “Tax Benefits for Adoption.”
The adoption tax credit may be taken the year before the adoption becomes final, the year it becomes final, or the year after, depending on various circumstances. (Read the IRS pamphlet!)
To apply for an income tax credit, be sure to keep records of all your adoption expenses—save all your receipts!—so that you can document them. You may have to give the IRS information such as the name of the adoption arranger and other details.
State of Adoption
Be sure to check whether your own state offers adoption deductions. For example, in 2003, Oklahoma passed legislation to increase to $20,000 (it was $10,000) the state income tax deduction for nonrecurring adoption expenses. Maybe your state has a similar deduction! Additionally, if you adopt a child from the state or county public social services department, the child may be eligible for Medicaid (free medical care). The child may also be eligible for a monthly payment from the state social services department (for which you would be the payee), particularly if the child has serious health or psychiatric problems.
Federal Laws on Health Insurance
If your employer gives you adoption money, you must subtract that before taking the federal income tax credit. Here are two simple examples: Let's say your expenses were an incredibly low $3,000, and your employer gave you a grant of $2,000. Because you only spent $1,000 of your own money, you only qualify for a $1,000 tax credit. (Unless you adopted your child from foster care, in which case you can take the credit of $10,160, regardless of what expenses you incurred, as long as you are within the income limitations.)
If you work for an employer that provides health insurance for your children, any children you adopt must also be covered, based on provisions of the federal Health Insurance Portability and Accountability Act (HIPAA) of 1996 as well as the Omnibus Budget Reconciliation Act (OBRA) of 1993. Whatever your insurance company would cover for a nonadopted child (with the exception of prenatal care and the delivery of your infant), they must also cover for an adopted child. Ask your attorney or social worker for further information.
Be sure to let your insurance company know as soon as possible when you adopt your child. They can't exclude any pre-existing medical conditions the child has, but it may take time to get a child into their bureaucratic system. If you have any problems with an insurance company refusing to cover your adopted child, contact the state insurance commissioner for help.
If you have individual insurance rather than insurance provided by your employer, the federal law does not apply, but state laws may mandate that your adopted child is covered. Check with your attorney or social worker.
It would be great if adoption were free, but thousands of families have figured out ways to cover the cost of bringing a new child into their families. Isn't your family worth the expense?