November is National Adoption Awareness Month. If you're considering adoption, you know that it will change your life in many ways. And you'll need to prepare for many of these changes – including the financial ones, because adoption can be expensive. The average U.S. adoption costs between $8,000 and $40,000, while the range for international adoptions is $15,000 to $30,000, according to the Child Welfare Information Gateway, a U.S. government-funded adoption information service.
The Middlesboro (KY) Daily News reports in "Thinking of adopting? Be prepared for expenses," that given these numbers, you might worry that you'll have a tough time paying for an adoption. You can, however, get financial help from some tax benefits. These include a credit for qualified adoption expenses and an exclusion from your taxable income of employer-provided adoption assistance.
The maximum tax benefit you can claim for this year is $13,400, which is reduced if your modified adjusted gross income (MAGI) exceeds $201,010 and is completely phased out if your MAGI is $241,010 or more. The adoption tax credit is nonrefundable, so it's limited to your tax liability for the year.
For example, say that you pay $13,400 in qualified adoption expenses in 2015, and your employer reimburses you for $3,400. If you meet the MAGI guidelines, you can exclude $3,400 from your gross income for 2015 and can claim $10,000 ($13,400 minus $3,400) for the adoption tax credit.
Remember that tax credits reduce your income tax liability dollar-for-dollar. Although these tax benefits will reduce your overall cost of adoption, you still have to find the money to defray all of the expenses of the adoption. The first step is to plan ahead, and as far ahead as you possibly can. The adoption process frequently takes a year or more, so you'll have some time to prepare. Select an adoption agency that best meets your needs, and get an estimate of the total costs. Once you have this, you can determine how to meet these costs.
Don't take out a loan from your 401(k) because a 401(k) loan will likely reduce the account's growth potential—which you need for retirement. There's also a loan from a bank, but that's still another debt to have to pay. If you were to wait for, say, two years, you might put away a specific amount every month in an "adoption fund" in an investment that's highly liquid and offers significant preservation of principal.
Adopting is wonderful, and a child will change your life. Planning ahead and carefully considering your options for paying for the adoption can help you do so with financial sense, now and in the future. And of course, once your planning comes to fruition, you'll want to plan for your family's future, no matter what the future may bring.
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Reference: Middlesboro Daily News (November 4, 2015) "Thinking of adopting? Be prepared for expenses"