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.
Given these numbers, you might think you’ll have a tough time paying for an adoption. However, you can get some financial help in the form of tax benefits, which include both a tax credit for qualified adoption expenses and an exclusion (from your taxable income) of employer-provided adoption assistance. In 2015, the maximum tax benefit you can claim is $13,400; this amount 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, which means it’s limited to your tax liability for the year.
Here’s an example of how you might use the tax benefits. Suppose you pay $13,400 in qualified adoption expenses in 2015 and your employer reimburses you for $3,400 of those expenses. Assuming 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. (Tax credits reduce your income tax liability on a dollar-for-dollar basis.)
Of course, while these tax benefits can reduce your overall cost of adoption, you still have to come up with the money – which, as we’ve seen, can amount to many thousands of dollars – in the first place. How will you do it?
Your first step is to plan ahead – as far ahead as possible. Since the adoption process can often take a year or more, you will generally have some time to prepare. When you find the adoption agency that best meets your needs, get an estimate of the total costs involved. Once you’ve got this figure, you can determine how you’ll meet these costs.
You might be tempted to take out a loan from your 401(k), but you should try to avoid this move – a 401(k) loan will likely reduce the growth potential of this account, which is designed for retirement. You might also consider a loan from a bank – but debt is debt, even if it’s for the purpose of expanding your family, and it’s always a good idea to keep one’s debt level down.
If you knew you wouldn’t need the money for, say, two years, you could consider putting away a certain amount each month in a special “adoption fund” in an investment that’s highly liquid and offers significant preservation of principal. If the circumstances of your life allow you to plan even farther ahead, such as three to five years, you can find a savings or investment vehicle that may be appropriate for providing the money just when you need it.
Adopting a child will change your life. Planning ahead, and carefully considering your options for paying for the adoption, can help you reach this major milestone in a manner that makes financial sense – now and in the future.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor (member SIPC). Contact Stan at Stan.Russell@edwardjones.com.