Money Mondays: Expanding Your Family
The cost of starting a family is astronomical, no matter which route you take. Nina has published several posts about the lengths we take to bring children into our lives. I did a double take at some of the figures she mentions. Despite the high price tag, I believe children are worth every penny.
We consider hundreds of factors when we think of expanding our families (with children, not pets). We question our capacity as parents and analyze our fears and doubts. However, we don’t usually consider our taxes.
There are hidden perks mixed in the myriad of joys of parenthood. Today’s Money Mondays looks at the tax benefits of being a parent and bringing a child into your life.
As non-hetero couples, our routes to parenthood are deliberately planned. No matter how we become caregivers to children there are tax benefits. Familiarizing yourself with them ahead of time prepares you for the venture and allows you to ask informative questions.
ADOPTION
If adoption is the route you’ve chosen, you may be eligible for an adoption credit of $10,960 for the 2006 tax year. If any of the following statements are true, you can probably claim the credit.
1. You paid qualified adoption expenses in:
a. 2005 and the adoption was not final by the end of 2005.
or
b. 2006 and the adoption became final in or before 2006.
2. You adopted a child with special needs and it became final in 2006.
3. You paid expenses after 1996 in connection with an adoption of an eligible foreign child and the adoption became final in 2006.
4. You have a carry forward adoption credit from a prior year.
The IRS defines qualified adoption expenses as the following:
- Adoption fees
- Attorney fees
- Court costs
- Travel expenses including meals and lodging while away from home
- Re-adoption expenses relating to the adoption of a foreign child
TIP: Because many states do not recognize adoptions finalized in other countries, many parents must apply with the US government for “re-adoption”. Click here for more info about re-adoption.
What if you and your significant other are adopting a child together? Your partnership may or may not be recognized by the state in which you live. The federal government definitely does not recognize it. So how do you handle the adoption expenses on your taxes?
If you adopt a child with a person (other than a hetero-spouse) you can split the adoption credit however you like. Just remember, the two of you combined can’t claim more than $10,960 per child. Simply cross out the amount preprinted on line 2 (in Part II) of IRS Form 8839 and handwrite your portion in the space above.
What if your partner is the parent of the child you would like to adopt? The IRS specifically states that the adoption credit cannot be taken for adopting your spouse’s child. Of course this means hetero-couples. Here is a loophole that works in our favor! Since the federal government does not recognize our partners as our spouses, we ARE eligible to claim this tax credit.
Use form 8839 to figure the amount of adoption credit you can take. Carry the final figure to line 59 on form 1040 or line 49 on form 1040NR, as the form instructs.
EMPLOYER PROVIDED ADOPTION BENEFITS
Some employers provide helpful adoption benefits to their employees. Usually your employer will reimburse you (or pay a 3rd party) for qualified adoption expenses. You receive tax benefits for utilizing this opportunity. Go for it!
The amount of benefit you receive will be reported on form W-2 box 12, marked with code “T”. You may be able to exclude this money from your income if any of the following are true.
1. You received employer-provided adoption benefits in 2006 (special rules apply for adoption of an eligible foreign child)
2. You adopted a child with special needs and the adoption became final in 2006
3. You received employer-provided adoption benefits after 1996 in connection with the adoption of an eligible foreign child and the adoption became final in 2006
The IRS defines “Eligible Child” as any of the following:
Any child under the age of 18. If the child turns 18 during the year, they are considered eligible for the portion of the year they were under 18.
Any disabled person physically or mentally unable to take care of himself or herself.
IN-VITRO FERTILIZATION, INSEMINATION, AND SURROGACY
If your route to parenthood involves in-vitro fertilization, insemination, or surrogacy, you may be able to deduct the costs of your medical expenses on Schedule A of your tax return. The amount you can deduct will vary. Typically you can deduct the amount of your medical (and dental) expenses that are more than 7.5% of your adjusted gross income.
The IRS allows deduction of expenses such as temporary storage of both eggs and sperm. They even allow the deduction of medical expenses to reverse prior surgery that prevented pregnancy, for example reverse vasectomy. For more information about deducting your medical expenses, refer to IRS Tax Topic 502 or contact your tax professional.
OTHER POSSIBLE DEDUCTIONS
There is a standard deduction for individuals who are claimed as dependents on another person’s tax return. This means that you can claim your children as a deduction. The deduction is usually the larger of $850 or the individual’s (child’s) earned income plus $300 (but no more than $5,150). Of course there are additional rules and eligibility requirements. For more information check out IRS Publication 929.
Finally, you may be able to claim “head of household” filing status if you are unmarried, and pay more than 50% of the cost of keeping up a home for yourself and your dependent(s) or other qualifying individuals. For 2006 the standard deduction for claiming head of household is $7,850. This is $2500 more than the standard deduction for filing single!
I hope this article helps you navigate the complex world of taxes for your expanding family. Take full advantage of the tax credits and deductions that apply to you. Next weeks Money Mondays will address investments, retirement accounts, and estate planning. In the meanwhile, share your tax related parenting advice below or e-mail your specific questions to Allison@queercents.com.
Thanks for your detailed coverage of this issue. Just a few additional comments (spoken as a mother, not a tax professional): I donated an egg to my partner, which she carried, and we petitioned the state to grant us both parentage rights without an adoption. Our legal expenses for this were not eligible for adoption credit or benefits.
Some states, such as MA, NJ, and CA, are now allowing both same-sex parents to put their names on the birth certificate without needing either adoption or court order of parentage. The National Center for Lesbian Rights is advising, however, that all non-bio parents still obtain one or the other to avoid problems when traveling out of state or dealing with the federal government. (See my interview with Cathy Sakimura of NCLR.) There are pros and cons of each choice, and they should be discussed with an attorney–but the adoption credit Allison mentioned is a point to consider.
Another point to consider if you are planning children — it may be hard to reach that 7.5% of income spent on medical expenses, in order to qualify for the deduction. IVF probably would, but maybe not IUI, for example.
However, the cost of donor sperm &/or eggs, and of their storage, are “qualified medical expenses” for pre-tax health savings accounts. And of course so are the costs of the fertility treatments, drugs, etc.
Still amazing to me that gay couples can adopt (and actually receive a benefit), but are not recognized as married couples.
Another interesting facet of gay adoption is how it relates to one’s retirement…or not.
My colleague recently penned a blog entitled “How Will Today’s Gay Adoptions Change the Future for LGBT Seniors?”
If you’d like to check out the blog, just go to http://www.gilbertguide.com/blog and enter the title.
Ami Icanberry