Tax Benefits for Adoption

Many potential adoptive parents are discovering that adopting a child can put a serious strain on family finances. There are two tax benefits to offset the expenses of adopting a child: the adoption tax credit and an exclusion from income of benefits under an employer's adoption assistance program.

Adoption tax credit

Adoptive families can offset their adoption costs by utilizing the Federal Adoption Tax Credit.

For example: John and Jane Doe adopt a child in 2010. The family spent a total of $30,000 in adoption-related expenses. John and Jane Doe qualified for the maximum federal adoption tax credit for 2010 of $12,170. After utilizing the credit, John and Jane Doe's total adoption expenses were reduced to $17,830. John and Jane Doe also qualified for a state adoption tax credit which totaled $3,037. (Please note that adoption tax credit limits vary in each state.) The Doe's final adoption expenses minus the additional state credit was $14,793.

Doe family adoption expense: $30,000
Federal adoption tax credit: -$12,170
State adoption tax credit: -$3,037
Final total minus available tax credits: $14,793

The income limit on the adoption tax credit is based on modified adjusted gross income (MAGI) and is gradually phased out depending on income.

If your MAGI is:	Then the MAGI limit:
$182,520 or less	will not affect your credit
$182,520 to $222,520	will reduce your credit
$222,520 or more	will eliminate your credit

The maximum adoption credit for 2010 is $12,170.

Adoption tax exclusion

Parents who work for companies with an adoption assistance program also get a tax break. Parents can receive up to $12,170 in reimbursement from their employer for adoption expenses without paying taxes on that benefit. However you can not double-dip. You can't take a tax credit for adoption expenses reimbursed by your company

Qualifying adoption expenses are reasonable and necessary adoption fees. Traveling expenses while away from home and other expenses directly related to, and whose principal purpose is for, the legal adoption of an eligible child.
For domestic adoptions, you can claim the credit for adoption-related expenses in the year the adoption is completed. If the adoption is not, you can claim the credit the following year.

For more information on the adoption tax credit and exclusion, visit www.irs.gov or contact a local accountant to discuss how these options may help you offset your adoption expenses.

The Role Flexibility Plays in Adoption

When pursing adoption, it is best that you and your spouse examine just how flexible you are regarding potential adoption situations vs. how long you are willing to wait for "the call."

Adoption is a personal decision and it becomes even more personal when considering what types of adoption and adoption situations you and your spouse are open to. While some couples are open to adopting a child of a different race or nationality than themselves, others find themselves uneasy with that prospect. Instead, many couples prefer to limit their adoption parameters, such as only being open to one race or are not willing to consider any adoption situations where the birth mother may have a certain medical or drug use history.

While this adoption journey is yours, it is also important to carefully step back and consider all aspects of your adoption, weighing what is most important to you and your spouse against other aspects that may not seem so important, after all. While it is perfectly OK to be strict in your adoption preferences, you should also recognize that this could impact your wait time. Couples who are stricter in their adoption preferences typically experience a longer wait time than those who are more open to various situations. For instance, if you and your spouse are only comfortable with adopting Caucasian newborn domestically whose birth mother reported no drug usage and a limited medical history, than you will likely endure a longer wait. However, if you are open to adopting an African-American child, or a child whose mother may have reported light drug use during her pregnancy, then you will likely experience a shorter wait. The same also applies to international adoptions -- if you are very strict in your preferences, you may wait longer for a referral that meets your parameters.

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Tax Benefits for Adoption

The Role Flexibility Plays in Adoption