How to Prepare Financially for Adoption

Congratulations.  You’ve decided to adopt a child.  Now how are you going to pay for it?

In honor of National Adoption Month, I’ve covered the importance of adoption and how the process works. Now, I’d like to switch gears and discuss how you can prepare financially. It’s a big challenge.  Adoptions typically cost tens of thousands of dollars, in addition to the already hefty expense of raising a child.

I want you to go into the process with your eyes wide open and be prepared the best you can. Taking the following five steps will get you well on your way.

 Know the Costs

As in most situations when you’re making a significant financial investment, it helps to know the costs you’ll incur ahead of time. Depending on the process you choose, adopting a child can run you as little as nothing, if you are adopting from foster care, to $50,000 if you adopt internationally.

That’s just the beginning.  You also need to consider what you will have to buy in order to make your house suitable for a child. Do you have an adequate room and furniture? If you’re adopting an infant, do you have a proper stroller and car seat?  You should price all of these things beforehand, so you can anticipate how much cash you will need and when you will need it. If you need help with pricing, the United States Department of Agriculture (USDA) offers a calculator to help you approximate the annual costs of raising a child or multiple children.  The Baby Center also offers a calculator for first-year baby costs. 

Track Your Spending

Frequent readers know that I firmly believe in tracking your spending. It’s one of the most important steps you can take to gain control of your finances. And it’s even more important when you’re adding a new major expense to your budget.

Knowing what is coming in and going out will afford you the most flexibility in making adjustments to your spending. You can easily balance the additional expenses you need to pay with the costs you can eliminate or cut back. With so many tools to help you, tracking your spending has never been easier.

Review Your Health Insurance

Most health insurances allow you to update your coverage when you have a Qualifying Life Event (QLE) like getting married, losing health coverage or, of course, having a baby. Review your coverage and make sure you have the plan that covers the essentials for your new child such as follow up visits, critical care or immunizations.  You may wish to change your coverage — either to a more comprehensive policy to manage out-of-pocket costs or to a higher deductible one to reduce premiums.  Be aware that some insurers only allow you to add the child to coverage, not change the underlying aspects of it, until open enrollment.

Buy Life and Disability Insurance

You need to make sure that your family has enough to live on if one or both breadwinners dies or is unable to earn a living.

How much coverage?  That depends on your budget, current assets and other circumstances (for example, do you have family members close by who can help?). Don’t rely on short cuts like estimating 10 to 12 times your income.  Instead, consider your annual expenses, how long the income would be needed and whether you want to purchase enough for one parent to not work for several years after an untimely death. Lastly, remember to buy term and invest the rest.

Statistically, you are much more likely to become disabled than die, so getting proper disability insurance is more important than ever.  Find out whether you have coverage through your employer, how comprehensive the policy is and what it will provide.  You’ll want to check on provisions for maximum coverage, any elimination period and whether benefits will be pre- or post-tax. Also don’t forget to look into retirement income protection insurance as a supplement to your policy.

Take Advantage of Your Benefits

It can cost a lot of money to adopt, but you may be able to reduce the burden with tax credits, employee benefits and grants.  You may be able to subtract certain adoption-related expenses from your taxes, for instance, through the adoption tax credit. This is a non-refundable credit (meaning it only benefits you to the extent of your tax liability) for qualified adoption expenses, which include:

  • Reasonable and necessary adoption fees,
  • Court costs and attorney fees,
  • Traveling expenses (including amounts spent for meals and lodging while away from home), and
  • Other expenses that are directly related to and for the principal purpose of the legal adoption of an eligible child.

For 2017, you can receive up to $13,570 per child. There are income limitations and other special considerations, especially if you adopt a special needs child. Check out tax topic 607 and the instructions on Form 8839 for more information. I also suggest consulting with your tax advisor to see how the credit fits your particular circumstances.

In addition to the adoption tax credit, you can take advantage of several other subsides. Many employers offer adoption assistance either through up front payments, paying certain fees or partially reimbursing expenses. Many states also offer subsidies, depending on the background of the child you adopt. Or you may find that you qualify for adoption grants from a foundation. Either way, you should explore all of the advantages open to you to offset some your upfront costs.

Keep in mind that both adoption assistance and the adoption credit are on the chopping block under the most recent House Republican Tax Plan. I’ll make sure to keep you up to date on changes that affect adopting families, as the bill moves through the legislative process.

You’ll likely never be fully prepared for the financial and emotional aspects of adoption. Hopefully these last few posts have given you an idea of what is coming your way and how you can get ready.