Navigating the Cost of Adoption
Adoption costs in the U.S. vary widely and can cost anywhere from $0 to $50,000 or more, depending on the type of adoption. Money to help defray the cost of adoption is available from both governmental and private-sector sources. These are the major ones:
Federal and state adoption assistance for children in foster care
Federal and state governments offer adoption subsidies for children adopted from foster care. To be eligible, the child must meet certain criteria, which can vary from state to state. “The term ‘eligible’ most frequently refers to children who are older; are part of a sibling group; or have specific physical, emotional, or developmental needs.
Federal tax credits for adoption
The federal government provides a tax credit to adoptive parents. Eligible expenses include:
- Reasonable and necessary adoption fees
- Court costs and attorney fees
- Travel expenses
- Other directly related expenses
The adoption tax credit is subject to income limits. In 2022, it begins to phase out if the taxpayer’s modified adjusted gross income (MAGI) is $223,410 or higher and it phases out entirely at $263,410. The maximum tax credit for 2022 is $14,890.
Grants and Loans for adoption
There are many private foundations and other organizations that offer grants and loans to adoptive parents. Please check the financial resources tab of our website for a detailed list. We helped our clients obtain over $100,000 in grants last year.
Employer-sponsored adoption benefits
A growing percentage of companies, the military, and governmental bodies have adoption assistance programs. These programs may not only provide financial assistance but also other benefits, such as parental leave.
Tapping your retirement accounts
Your 401(k) plan at work or an individual retirement account (IRA) on could also be a source of funds. Normally, if you’re under age 59½, any withdrawals you make will be subject to a 10% early withdrawal penalty on top of the income tax you owe. Since the passage of the SECURE Act in 2019, however, adoption is one of the exceptions to the penalty.
Under current tax law, individuals can take a penalty-free distribution of up to $5,000 to pay for adoption expenses “during the 1-year period beginning on the date on which the child of the individual is born or on which the legal adoption by the individual of an eligible adoptee is finalized.”
The law also specifies that the adoptee must be an eligible adoptee, which the IRS defines as “any individual (other than a child of the taxpayer’s spouse) who has not attained age 18 or is physically or mentally incapable of self-support.”
Under these rules, a married couple could take tax free distributions totaling $10,000.