Planning For Adoption: Understanding Different Pathways And Their Costs, Tax Breaks, And Financial Assistance Available

The Different Paths To Adoption And Their Costs

Adoption is the social and legal process in which an adult is formally made the parent of another individual (typically a child). The adoption process helps fill a critical need in society: to unite children who need loving families with those who want to raise children. Yet, depending on the type of adoption (e.g., private, international, etc.), the price tag of $70,000+ in the U.S. can make this family-planning option financially burdensome or even outright inaccessible. 

And given the substantial tax credits available to adoptive parents, the most substantial being the Adoption Tax Credit (for up to $14,890 per child in 2022), along with other forms of financial assistance and benefits to consider, advisors have a unique opportunity to help clients considering adoption to plan for and identify ways to reduce potentially exorbitant costs.

Why Families And Individuals Choose To Adopt

According to the Adoption Network, a California-based corporation that provides adoption services nationwide, there are many reasons why households choose to adopt a child. Some of the most common include the reasons discussed below.

Struggles with fertility. The Adoption Network estimates that about 1 in 8 Americans cannot safely carry a child to term. Aside from Assisted Reproductive Technology (ART) procedures like In Vitro Fertilization (IVF) and artificial insemination (which can be very expensive and out-of-reach for many families), there remain very few options for individuals with difficulties conceiving a child. Fostering, adoption, and surrogacy are often the most prevalent options for these individuals. 

Single adoptive parents who are ready to start a family. Single parenting is becoming more common in the U.S. as the number of single households grows and viewpoints about traditional marriage change. Adoption policies also continue to evolve as being married is no longer a requirement to adopt for many agencies.  

Same-sex couples who want to raise a child together. According to the Williams Institute, same-gender couples are 4 times more likely than heterosexual couples to adopt a child, and a 2007 report by the Urban Institute estimated 2 million LGBTQ people expressed interest in adopting. LGBTQ individuals have historically faced barriers to adopting, especially with the passage of the Defense of Marriage Act (DOMA) in 1996, banning Federal recognition of same-sex marriages. However, key sections of DOMA were overturned by 2 landmark Supreme Court cases – United States v. Windsor in 2013 and Obergefell v. Hodges in 2015 – leading to recognition of same-gender marriage on the Federal level and greater acceptance of adoption by LGBTQ individuals and families. The passage of the Respect for Marriage Act in December 2022 repealed DOMA altogether. Today, all 50 states allow same-gender married couples to adopt. 

Growth of existing families. Some households may already include biological children, and adoption can be an attractive option to grow a family without going through the physical demands of childbirth.

Pathways To Adoption 

There are many different types of adoptions and various pathways prospective parents can take to achieve their goal of adopting a child. 

Foster Care: Adopting Through The Welfare System 

Foster care is typically considered a temporary living situation for children whose biological parents are in crisis and unable to care for them. While in foster care, a child may live with relatives, in a state-run facility, or in congregate care (i.e., a residential childcare community). If the biological parents are not reunified with their child, their parental rights can be terminated, and their child can become eligible for adoption. According to the U.S. Department of Health and Human Services Children's Bureau, there were almost 400,000 children in foster care in 2021, with 114,000 waiting for an adoptive family. 

Foster care is considered one of the least expensive methods of expanding a family but is not guaranteed to end in a successful adoption, as there is always the risk of the child being reunited with their biological family. While adoption through foster care can vary widely depending on the state, nonprofit domestic adoption agency American Adoptions estimates an average cost of $2,744, which encompasses attorney fees, home study fees, travel, and other expenses. 

Private/Domestic Adoption

Private adoption generally refers to 1 of 2 different types of adoption processes: 1) agency adoption, where a licensed adoption agency works with both the birth and adoptive parents to provide matching and screening services; and 2) independent adoption, where the birth and adoptive parents typically forgo the services of an adoption agency and instead work with a trusted adoption attorney to complete the process. Independent adoption is commonly used when the birth and adoptive parents already know each other and have a good relationship.

The cost of an agency adoption varies wildly depending on the licensed agency. The Adoption Network estimates the cost of private domestic adoption to range from $25,000–$50,000. This is considered one of the most expensive options as the agency might require additional costs to cover their fees and assist with other expenses (e.g., prenatal care, medical, attorney, and court costs). 

Independent adoptions can be much lower at around $10,000+ to cover reasonable costs, which typically include drafting legal documents and providing medical care for the birth parent.

International Adoption 

International adoption involves adopting a child from a country other than the adoptive parent(s) and relocating the child to the adoptive parent's country of residence to live there with them permanently. Historically, this has been considered a popular way to adopt; however, international adoptions have declined significantly over the past decade due to geopolitical tensions, tightening laws, and the coronavirus pandemic. 

The Hague Adoption Convention, an international treaty created to provide important safeguards for intercountry adoptions, requires specific processes for the adoption of children who live in participating countries, including working with an accredited adoption service provider, completing an intercountry home study, and obtaining immigrant visas. 

While international adoption has some similarities to private adoption, many unique costs need to be considered, including travel expenses, lodging, and home study costs. International adoptions often cost more than domestic adoptions, with the Adoption Network estimating costs ranging from $30,000–$80,000. Additionally, foreign countries often have their own unique rules and requirements for U.S. citizens seeking to adopt internationally, so it is important for potential adoptive parents to be aware of the particular adoption process for their country of interest. 

Travel expenses. Travel expenses can vary widely depending on the resident country of the child and can encompass things like airfare that might require multiple trips to the child's country before the adoption is finalized.

Lodging. Adoptive parents will likely need to secure a place to stay during their visit(s), which may last for a considerable amount of time as international adoptions can take up to a month in some cases. Depending on the adopted child's age, adoptive parents may need items like diapers, baby carriers, formula, clothes, snacks, and toys to provide care and keep the child occupied during the trip home. 

Home study costs. Home studies are required to be completed by all new adoptive parents. The study typically involves a licensed social worker conducting a home inspection and interviewing the adoptive parents to ensure they will raise the adopted child in a healthy environment. Additional costs cover documentation prep (e.g., financial statements, background checks, child passports, and visas) and medical exams making international adoption the most expensive method.

American Adoptions provides a breakdown of estimated adoption costs for the following countries:

• China: $26,000–$31,000 plus travel
• Haiti: $26,000–$32,000 plus travel
• South Korea: $22,000–$27,000 plus travel
• Uganda: $24,000–$30,000 plus travel and costs to foster the child in Uganda for a year

Transracial Adoption

Transracial adoption involves placing a child of a different race or ethnicity than the adoptive parent(s). This type of adoption is becoming increasingly common as individuals and couples continue to show openness to raising children of all backgrounds. White children are estimated to comprise approximately 37% of all U.S. adoption, which means that most American adoptions involve children of diverse races and ethnicities. Transracial adoptions can take place domestically or internationally and are considered a separate adoption category because of the unique cultural issues often involved. 

While research has suggested that adoptive children of color are better off being raised by parents of the same race, as they are generally better equipped to prepare their children for the societal challenges associated with not being white, white adoptive parents can and often do adopt children of color. So for these parents, adoption will require mindfulness and intentionality around helping the child stay connected to their cultural background and helping them cope with inevitable racism and discrimination.

The cost of transracial adoption is widely considered to be controversial, as some private adoption agencies have been known to charge less to place children of certain races as the adoption process tends to be slower for children of color, particularly Black children. In 2013, NPR reported the average cost to adopt a white child was approximately $35,000 plus legal expenses, while the cost to adopt a biracial child was between $24,000–$26,000, and the adoption cost of a Black child was about $18,000.

Additionally, some parents in less racially integrated communities have relocated their primary residence to neighborhoods where their children can be closer to their culture and communities of people who look like them. This is an additional cost to consider.

Second-Parent And Step-Parent Adoption 

Second-parent adoption and step-parent adoption may sound similar, but the distinct difference is marriage. Whereas a legally married spouse would typically seek a step-parent adoption for a child that was conceived from a prior relationship, an unmarried partner would pursue a second-parent adoption. 

However, married same-gender couples have used second-parent adoptions as an extra layer of protection in scenarios where Assisted Reproductive Technology was involved, particularly in the case of a non-gestational parent, and as a means to ensure the rights of both parents are respected in all 50 states, especially in states that may be less protective of LGBTQ rights. This is because some states have very narrow definitions of what a legal parent is, and merely being named on a child's birth certificate does not guarantee the state recognizes parentage. 

For example, earlier this year, in February of 2023, there was an instance where a lesbian couple initiated divorce proceedings in Oklahoma and legal custody was questioned. Courts ruled in favor of the gestational parent and sperm donor. A second-parent adoption would have allowed for an expanded definition of parenthood going beyond 'biological mother and father' by acknowledging the legal rights of non-gestational parents, which may have been leveraged by the non-gestational parent in Oklahoma to their benefit.

While the costs of second-parent adoptions mainly depend on the state of residence, the Human Rights Commission estimates that, on average, they can range from $2,000–$3,000 depending on home study and legal expenses. 

The potentially high costs of the adoption process underscore the importance of planning ahead. Financial advisors with clients considering adoption can help their clients by reviewing options for funding, assessing the impact on the client's overall financial plan, and identifying tax strategies to help mitigate some of the costs. 

 

Financial Assistance Available For Adoptive Parents

Exploring Public Resources To Supplement Costs

Each U.S. state has a dedicated program providing adoption subsidies to offer financial support for parents of children adopted through the foster care system in the child's state. Many states provide this assistance as a one-time payment with specific qualifications and restrictions. The benefits widely vary depending on the child's unique situation and the state's policies.

The U.S. Department of Health & Human Services Child Welfare Information Gateway offers a database of adoption and guardianship assistance details by state but notes that "Although every effort has been made to ensure this information is comprehensive and up-to-date, further details may be found in State statutes, State administrative code, and/or State agency websites. These resources can be accessed through our State Statutes Search by selecting Links to State and Tribal Child Welfare Law and Policy." 

 

In addition to one-time subsidies, many states offer ongoing financial support for adoptive parents. For example, California offers aid through the Adoption Assistance Program, administered by the California Department of Social Services. It is designed to provide ongoing financial support for special-needs foster youth once placed with an adoptive family. The adoption subsidy can come as monthly cash payments ranging from $800–$1,000+ depending on the child's need and negotiations settled between the adoptive parents and the state agency. 

A comprehensive breakdown of monthly subsidy programs by state can be found on the website. Additionally, adopted children who qualify for subsidies often qualify for other state-sponsored benefits like Medicaid and SNAP. States may also offer reimbursement of adoption and legal fees.

Since 1974, the IRS has ruled that adoption assistance benefits are generally exempt from taxation since they're considered "money from a public welfare fund".

Employer-Provided Resources For Adoption Support

A growing number of employers are offering benefits for adoptive parents who have worked for a specified time. A Monster.com article covering adoption benefits offered by American companies notes that an estimated 650 American companies provide some type of adoption benefits. Employer-sponsored adoption benefits are typically inexpensive for employers since most employees don't elect them. They can include reimbursement of adoption expenses like home studies, legal and agency fees, and travel. Additionally, they can also include counseling and referral services. Some companies also have paid parental leave policies for adoptive parents. 

Bank of America, for instance, offers a Family Planning Reimbursement Program to its employees to cover eligible adoption expenses up to a lifetime maximum of $20,000 during the course of an employee's career. KPMG, a 'big four' accounting firm, offers its employees up to $35,000 in adoption expense reimbursement through its Adoption Reimbursement Program. The software company, NVIDIA, offers employees unlimited reimbursement for what they define as "Qualified Adoption Expenses" through their Adoption Assistance Plan. 

Charitable Organizations

In addition to state and employer-provided assistance, there are charitable organizations that offer non-taxable grants to adoptive families.

The Gift of Adoption Fund is a nationwide charitable organization and is considered the largest provider of adoption assistance. The organization awards up to $15,000 for relative, domestic, and international adoptions every month. Priority is given to children either in or at risk of entering the foster care system and to siblings who need to be kept together. There is no application deadline, and prospective parents can apply anytime after successfully completing their home study. 

A Child Waits Foundation is another prominent charitable organization that offers adoption grants of up to $7,500 and low-interest loans to help offset some of the costs of adoption. The program supports prospective parents pursuing international adoption, prioritizing children living in orphanages. The grants are needs-based, with eligibility limited to households with a maximum income of $150,000.

Help Us Adopt is a national financial grant program that awards grants of up to $20,000 for the cost of adoptions. The organization targets domestic, international, and foster care adoptions and doesn't require an application fee. Applicants are required to demonstrate significant financial need. Additionally, the grants are only payable to a licensed adoption agency or attorney and cannot be paid directly to the parents. 

Alternative Financial Support Options

Prospective adoptive parents can consider fundraising/crowdfunding opportunities to help subsidize adoption costs. AdoptTogether is the world's largest nonprofit crowdfunding platform that helps families raise money for adoptions. Prospective parents can create a family profile on the website with their adoption story, photos, and fundraising goal. The profile is made public and can be shared with family and friends. To receive the funds raised, parents can make a simple grant request and provide supporting documentation of the adoption-related expenses. The Board of Directors reviews the requests every month and grants a check about a week later. Donations are tax-deductible, with a 5% transaction fee deducted from all donations. Donors can also access corporate matching-gift programs where matching gifts can be doubled or even tripled through an employer. 

GoFundMe is another prominent fundraising website that can raise money for adoption expenses while allowing family and friends to participate. The process involves setting up an account where prospective parents post their stories with images and videos. The profile can be shared exclusively with family and close friends or with a wider social circle via social media, email, and other public platforms. Donors can comment on the story, and prospective parents can post updates about their adoption journey. 

When Financing With Debt Can Make Sense

Taking out a personal loan can be a viable last-resort option if insufficient funds are available from personal savings or third-party resources, reducing the potential for a cash crunch. Borrowing funds could also help bridge the gap for adoptive parents while they fundraise, apply for grants, or benefit from the Federal Adoption Credit. In addition to securing loans from a bank or credit union, borrowers can also look to low to no-interest loans available from organizations that support adoption, like A Child Waits Foundation or The Hebrew Free Loan Society for adoptive families of the Jewish faith. 

Those who own a home might consider applying for a Home Equity Line Of Credit (HELOC) to pay for an adoption. A HELOC can be used multiple times throughout the draw period and can cover various expenses throughout the adoption process, which can be an attractive option for some borrowers. However, this option comes with certain critical risks to homeowners, primarily the risk of losing their homes if they cannot pay the full amount owed. Additionally, HELOCs are typically structured with variable interest rates, which could increase the payments over time as interest rates change. 

A 401(k) plan loan is an option for adoptive parents who may not have access to a HELOC or qualify for personal loans. While 401(k) plans have their own unique terms and limits where loans are concerned, current IRS rules allow account owners to borrow 50% of their vested balance up to $50,000 (or up to $10,000 when 50% of the vested balance is less than $10,000). 

401(k) plan borrowers must typically make quarterly payments to repay the loan within 5 years. While this could be a less risky option than a HELOC (as it doesn't put a home at risk), if the adoptive parent(s) lose their job, there's a good chance the account owner will be required to repay the loan fairly quickly or risk having their account balance reduced by the amount owed, with that amount considered a taxable distribution. If under the age of 55, an additional 10% withdrawal penalty would also apply. 

Ultimately, taking out any type of loan to cover adoption expenses should generally be considered a last-resort option.

Tax Planning Considerations To Help Clients Curb Adoption Costs

Helping clients leverage the tax code can play a significant part in helping them plan for the costs of an adoption. As clients navigate their adoption journey and consider some of the strategies outlined above, advisors can further help them by keeping their eye on key tax considerations, including the Federal Adoption Credit, one of the largest income tax credits available to taxpayers, the income exclusion allowance for adoption expenses paid by employers, and the potential ability to use retirement funds for adoption expenses with no early withdrawal penalties, among other planning strategies.

Federal Adoption Credit 

The Federal Adoption Credit provides a nonrefundable credit of up to $14,890 per child for qualifying expenses related to adoptions in 2022 (claimed on tax returns filed in 2023) and $15,950 per child for adoptions in 2023 (claimed on tax returns filed in 2024). There is no limit on the number of adopted children this tax credit can apply. For example, if a parent adopted 2 children in 2022, the maximum credit they could claim in 2023 would be 2×$14,890 = $29,780. To calculate and claim the credit, adoptive parent(s) must complete IRS Form 8839 (Qualified Adoption Expenses). 

The Adoption Credit Includes MAGI phaseouts beginning at $239,230 and ending at $279,230 for 2023 (up from the 2022 phaseout range of $223,410–$263,410). The conditions for claiming this credit can be complicated and depend on various factors, such as the timing and type of adoption. 

Per the IRS, qualifying adoption expenses must be reasonable and necessary. They can include court costs, attorney's fees, agency fees, traveling expenses (including meals and lodging), and other expenses directly related to the eligible child being adopted. Expenses required by the state as a condition of the adoption (e.g., installing a gate around a pool) may also qualify. 

The type and timing of adoption are essential to determine when the credit can be claimed. The IRS has published the following about determining the tax year that taxpayers can claim the Adoption Credit:

Generally, the credit is allowable whether the adoption is domestic or foreign. However, the timing rules for claiming the credit for qualified adoption expenses differ, depending on the type of adoption.

• A domestic adoption is the adoption of a U.S. child (an eligible child who is a citizen or resident of the U.S. or its possessions before the adoption effort begins). Qualified adoption expenses paid before the year the adoption becomes final are allowable as a credit for the tax year following the year of payment (even if the adoption is never finalized and even if an eligible child was never identified).
• A foreign adoption is the adoption of an eligible child who isn't yet a citizen or resident of the U.S. or its possessions before the adoption effort begins. Qualified adoption expenses paid before and during the year are allowable as a credit for the year when it becomes final. Once an adoption becomes final and subject to the dollar limitation, qualified adoption expenses paid during or after the year of finality are allowable as a credit for the year of payment, whether the adoption is foreign or domestic.

As a result of the timing rules, qualified adoption expenses allowable in the current year may include expenses paid in a former year or years.

Accordingly, being strategic about when to claim the Adoption Credit is one way that financial advisors can help their clients manage their total adoption expenses. For example, if the adoptive parent's income is too high to claim the credit in the current year due to income phaseouts, the advisor may suggest that they consider deferring the payment of eligible adoption expenses to the next year after the adoption is finalized. 

Alternatively, shifting taxable income to a later year is another way to help clients avoid the loss of adoption tax benefits due to phaseouts for high-income earners. Adoptive parents whose current income may be too high to access the credit in a given year may seek opportunities to shift some of their taxable income to an alternative year. Conversely, taxpayers with income that is too low to benefit from the Adoption Credit (since it's nonrefundable) can consider opportunities to shift income to the current year to maximize the benefit. 

The Adoption Credit can be carried forward for up to 5 years. If parents can't generate sufficient income to use the credit, they can still claim the credit on Form 8839 even if they don't use it in the first year. They could apply the credit to future years when there may be higher tax liabilities, eliminating the need for amending past tax returns once they do have enough income to claim the tax credit.

Notably, if the adopted child is declared to have special needs by the state of the child's residence, they may qualify for the full tax credit (subject to MAGI limitations and less any qualified adoption expenses previously claimed for the same child) regardless of whether the adoptive parents incurred expenses. 

The IRS also allows parents to claim the credit for failed adoptions. However, any credit they received for a failed adoption would be subtracted from what they would be able to receive after a successful placement. 

Income Exclusion Allowance For Adoption Expenses Paid By Employers

In addition to the Adoption Credit, the IRS allows an income exclusion of up to $14,890 per child (2022) for certain adoption expenses paid by an employer (likely as part of an employee benefits package) either directly to the employee or to a third party such as an adoption agency or attorney. While this income exclusion can be applied in the same year when the Adoption Credit is claimed, it cannot be claimed for the same expenses. 

Example: Mason and Karen are adoptive parents and paid $10,000 in qualified adoption expenses. As part of a company-wide benefits package supporting employees seeking to adopt a child, their employer reimbursed them for $4,000.

While Mason and Karen can exclude the reimbursed amount from their taxable income, they can no longer consider that amount as qualified expenses for purposes of claiming the Adoption Credit. 

As a result, Mason and Karen can exclude $4,000 from their taxable income, and they can claim a total of $10,000 − $4,000 = $6,000 for the Adoption Credit. 

Understanding Tax Implications Of Using Personal Retirement Funds For Adoption Expenses

The SECURE Act created a new opportunity for parents to withdraw up to $5,000 from their IRAs or employer-sponsored plans without the 10% early distribution excise tax following the birth or adoption of a minor child. While the original act provided parents with the option (but not the obligation) to repay the distribution at any time the plan is active, the 2022 update to the SECURE Act added a 3-year time limit on the repayment period for qualified adoption expenses, beginning on the date of distribution. 

Notably, 2 parents with their own retirement plans can each withdraw up to $5,000 from their plans. So, in essence, a couple could elect distributions totaling $10,000 for qualified adoption expenses. Additionally, the withdrawal maximums are per child, so a couple could potentially withdraw more than the $10,000 combined if adopting two or more siblings.

While the distributions would be penalty-free, the amount would still need to be reported as taxable income. Which is important, as taking such a distribution can put taxpayers at risk of getting pushed into the next tax bracket and being subject to higher tax rates. 

According to the National Association of Plan Advisors, some additional details to consider when considering retirement account distributions to cover adoption expenses include:

• If considering an employer-sponsored plan like a 401(k) or 403(b) plan for withdrawals, employees under the plan's normal retirement age should first confirm with the employer that the plan sponsor permits early distribution in the first place since not all of them are required to. 
• Early distributions can be initiated only after the adoption process is completed, and they must be made within 12 months of completion. 
• Employees should check with the employer and the plan sponsor to confirm any requirements that must be met, including documentation that may need to be submitted to substantiate the adoption process and related expenses. 

Additional Tax Benefits Available To Adoptive Parents

In addition to the Federal Adoption Credit and the income exclusion allowance for adoption expenses paid by employers, there are other tax credits available for all parents, whether adoptive or biological. For parents with a qualifying dependent child under the age of 17, the Child Tax Credit (CTC) can offer a tax break of up to $2,000 per child. 

To be eligible for this tax benefit, the taxpayer must have a Modified Adjusted Gross Income (MAGI) of $200,000 or less if filing single or $400,000 if filing jointly (for the 2022 tax year). The credit begins to phase out above these amounts. Additionally, the child being claimed must have a Social Security number during the time of the filing, they must be legally recognized as the parent's child or eligible foster child, and they must have lived with the parent for over half the year. Parents can claim the credit by entering the eligible child(ren) on Form 1040 and attaching a completed Schedule 8812. 

Working parents who pay childcare expenses for a dependent child under the age of 13 and who have lived in the U.S. for more than half the year are eligible for the Child and Dependent Care Credit (CDCC). Parents may claim this credit if they paid childcare expenses for the eligible child in a given year while working or actively looking for work. Depending on the taxpayer's AGI, the credit provides up to 20%–35% of eligible childcare expenses paid during the year as a tax credit, calculated by completing IRS Form 2441. 

Parents can claim up to $3,000 in childcare expenses per child and up to $6,000 for 2 or more children. So for 1 child, the maximum credit parents can claim is $3,000 × 35% = $1,050. The maximum credit for 2 children or more would be $6,000 × 35% = $2,100. Notably, parents of all incomes can claim this credit, although the maximum credit of 35% of eligible expenses applies to taxpayers whose AGI is $15,000 or less, phasing out to a maximum credit of 20% of eligible expenses for taxpayers with AGI over $43,000 (for tax year 2022). 

State-Level Tax Benefits For Adoptive Parents 

In addition to the tax benefits provided by the Federal government, there are also resources available to adoptive parents available at the state level. According to the American Adoptions website, there were 17 U.S. states as of May 2017 offering adoption benefits in the form of either a tax credit or deduction to help subsidize the cost of adoption (with certain qualifications and restrictions depending on the state's program): 

While state laws can change at any time, advisors can check for updated tax legislation in their clients' states to help them identify additional benefits that may be available to them.

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Expanding a family through adoption can be a wonderful experience, but it can also be intimidating and overwhelming when navigating the financial side of things. An advicer can offer valuable support by helping adoptive parents consider the costs involved in the process and how those expenses can vary drastically depending on the path they decide to take. 

Furthermore, financial advisors can help adoptive parents develop a firm grasp of their personal financial situation along with a good understanding of the various options that are available to defray the costs of adoption. Through good research and prudent financial planning, advicers can help make adoption a reality for many loving and eager families.