International adoption may seem as a costly undertaking. Especially when you are anaware of resources that are available to you.
Financial resourses
As adoption has gained in acceptance as a way to begin or expand a family, employees and employers have become more interested in adoption benefits. Employers sensitive to family issues recognize the importance of adoption benefits to those considering adoption. Many companies find that offering monetary and/or leave benefits has created good will within the company, has incurred minimal costs, and has engendered a positive public image. And indeed, many prospective parents, especially those who are single, could not adopt without the support of their employers.
Adoption Benefits Plans
An adoption benefits plan is a company-sponsored program that:
- Financially assists or reimburses employees for expenses related to the adoption of a child and /or
- Provides for paid or unpaid leave for the adoptive parent employee.
Often, companies offer adoption-related benefits, but they are not part of a separate adoption benefits plan. They may be offered under general employment leave or maternity/paternity benefits.
Financial Assistance or Reimbursement
Adoption benefits are usually available to all regular employees. In some cases, the employee needs to have worked for the company for a specific amount of time; in others, enrollment in a company insurance plan is required. The designations used by many companies for those eligible are full-time salaried Permanents or “regular” employees.
Coverage varies widely, with benefit amounts ranging up to $6,000 per adoption. The most common approaches are:
- Reimbursement for specific expenses;
- Specific “set” allowance, regardless of expense; or
- Reimbursement or coverage through the company’s medical plan for medical expenses only.
Most often, employees are reimbursed for a given percentage (80 percent appears to be the norm) of specific itemized expenses. It may also be possible for companies to provide coverage for adoption-related legal expenses by including adoption in company-sponsored group legal plans for employees.
When Are Benefits Paid?
In most cases benefits are paid after the adoption is finalized. Some companies, recognizing the accumulating expenses and the need for a child to live in the home prior to finalization, are providing reimbursement earlier-when the child is placed in the home or as expenses are incurred. The reimbursement for the adoption of children with special needs is paid after finalization.
Are Benefits Taxable?
Currently, adoption benefits in the form of cash assistance are federally taxable. However, there are ways for companies to provide employees with non-taxable benefits related to adoption. Medical and legal expenses may be covered under company sponsored group plans, which are currently non-taxable.
Adoption Leaves
An informal poll of companies shows that many provide adoption leave on an individual basis, at the supervisor’s discretion. Often, adopting employees can use personal leave time when the child joins the family or they may use vacation time even though no formal adoption leave exists.
With the passage of the Family and Medical Leave Act in 1992, employers with 50 or more employees, including the Federal Government and the Congress, must offer both male and female employees up to 12 weeks of unpaid leave upon the birth or adoption of a child. The employee is guaranteed his present job or one considered equivalent and the employer is required to continue health benefits during the leave period.
State Policies
Policies on maternity leave vary from State to State. In Minnesota, all companies with 21 employees or more must offer up to 6 weeks of unpaid leave to both mother and father, who can take the leave at the same time and return to their original jobs or ones with comparable duties and salaries.
Other States that require employers to offer parental leave to adoptive parents include: Connecticut, District of Columbia, Maine, Massachusetts (female employees only), New Jersey, Oregon, Rhode Island, Washington, and Wisconsin. In addition to these States, Colorado and New York, while not mandating employers to provide parental leave, do require them to offer leave to adoptive parents if they offer it to biological parents. Kentucky parental leave law specifically applies only to adoptive parents.
Types of Adoption Leave
Most companies will allow an employee to take unpaid leave. While companies may offer their employees either paid and/or unpaid leave, the leave may be listed under a heading other than adoption. Paid leave may be defined as:
- authorized time off,
- discretionary time,
- annual or paid personal leave, or
- annual or all-purpose time.
The length of paid leave usually depends on the amount of leave time the employee has accrued. In some cases, a maximum duration of paid leave is set by the company.
Unpaid adoption leave may be considered as:
- personal leave,
- child care leave,
- personal hardship leave, or
- medical leave.
Most companies offer limits ranging from 2 weeks to 1 year, with the median at 6 months. Some companies, however, set no time limits, but prefer to be open or negotiable, depending on individual circumstances.
In addition to employer-provided benefits, those who adopt children internationally may be entitled to reimbursement from other sources. Many adoptive parents are eligible for tax benefits worth, in some cases, several thousand dollars. Certain tax benefits primarily affect lower income families; others can affect middle and even upper income families. All adoptive parents should meet with a tax advisor to discuss which of the following tax benefits may apply.
Federal Assistance
President Clinton signed into law the Small Business Job Protection Act of 1996 (SBJPA) Public Law 104-188. Enacted on August 20, 1996, this legislation created a two-part adoption assistance tax relief program and although the SBJPA was mainly aimed at helping the small business economy, it ultimately encouraged more and more adoptions where the financial impacts are a serious concern.
Federal adoption assistance under the Code is now available through two separate approaches:
- A taxpayer may claim a nonrefundable tax credit on his or her income tax return for qualified adoption expenses. (Under I.R.C. ¤ 23(a)(1))This allows the taxpayer to deduct from income taxes owed an amount equal to the allowed adoption expenses actually paid or incurred. Any excess of allowed credit over tax due may be carried forward and used within the next five years.
- The taxpayer may exclude from taxable income amounts paid by his or her employer for such expenses. (Under I.R.C. ¤ 137(a))This permits the taxpayer to omit from income any employee assistance program reimbursement for adoption expenses. Provided that there are enough expenses so that none are counted twice, the taxpayer may even qualify under both provisions.
The maximum tax credit or income exclusion available under each section is $10,160 per adopted child. The child must be less than 18 years of age or otherwise unable to care for herself or himself when adopted.
As with many tax benefits, the adoption tax credit and income exclusion will be phased out at certain income levels. If the taxpayer’s adjusted gross income (AGI) is less than $152,390 for the year in which the credit or exclusion is claimed, the allowed amount will not be reduced. Between $152,391 and $192,389 of AGI, however, the benefit is partially reduced. For example, at $170,000 of AGI, the maximum tax credit and/or income exclusion is reduced by 50%. No benefits are available for an AGI of more than $190,000.
Qualified adoption expenses that may be claimed for tax credit or income exclusion are any reasonable and necessary adoption fees, court costs, legal fees, and other expenses directly and principally related to the legal adoption of an eligible child by the taxpayer. Expenses reimbursed by one’s employer or the Federal Adoption Assistance program may not be claimed for the tax credit, and any business owner with more than 5-percent ownership may not receive more than 5 percent of the total benefits paid under the company’s adoption assistance program.
To claim the tax credit or take an income exclusion, married adoptive parents must file a joint tax return unless the special rules governing head-of-household status apply. Unmarried individuals who pay expenses pertaining to the same child are treated as one taxpayer for purposes of this benefit.
For the details visit http://www.irs.gov/pub/irs-pdf/p968.pdf at http://www.irs.ustreas.gov/
Other Federal Tax Credits:
1. Dependency exemption
- Adoptive children qualify if a five-part test is met
- Exemption of $5,000 for each qualifying dependent
http://www.pueblo.gsa.gov/cic_text/children/adoption/helpc.html – An overall useful site.
2. Child and Dependent Care Credit
- For expenses of work related child care
- Unreimbursed child care expenses for a foster or adoptive child qualify, but only if the child is claimed as a dependent
- Average child care credit in U.S. is $425
http://aaicama.aphsa.org/IssueBriefIndex.html
3. Education credits
- Available for college tuition
- Also available for certain vocational training courses
- Student must be a dependent of the taxpayer
- Education credits are worth up to $1,500 per year per student
Other Adoption Assistance Programs
State Reimbursement
A reimbursement for non-recurring adoption expenses (agency fees, legal costs, and transportation) is available through each State for families who adopt children with special children from minority cultures. To find out about your state tax credits, try the web using the addresses:
http://www.pueblo.gsa.gov/cic_text/children/adoption/interb.html
Military Subsidies
Military families are entitled to a reimbursement of adoption costs up to $2,000 through the Defense Authorization Bill of 1991. The law provides payment for most adoption-related expenses for infant, international and special needs placements.
http://www.pueblo.gsa.gov/cic_text/children/adoption/helpf.html
Loans
http://www.pueblo.gsa.gov/cic_text/children/adoption/helpi.html
The information presented on this page is prepared with the purpose of highlighting a general nature of financial assistance available for adoptions parents; it should not be acted upon except in consultation with a tax advisor.
Volunteer Income Tax Assistance (VITA) programs offer free assistance in preparing tax returns. Low Income Taxpayer Clinics (LITC) offer free assistance to lower income taxpayers (earning less than $45,240 for a family of four) regarding disputes with the IRS. For information on the nearest VITA or LITC, call (800) 829-1040.