Adoption Assistance Accounts
The take care adoption account option is for expenses paid in connection with adopting a qualified child.
Employees set aside pre-tax payroll deductions to pay qualified expenses, including home study and application fees, reasonable and necessary legal adoption fees, court costs, attorney fees, agency fees, medical services and counseling, travel and lodging fees and other expenses which are directly related to, and the principal purpose of which is for a legal adoption.
Adoption expenses that qualify for payment must be for an individual who has not attained the age of 18 at the time of the adoption, a child that is physically or mentally incapable of caring for himself, a child with special needs who cannot or should not be returned to the home of his or her parents and a specific factor or condition makes it reasonable to conclude that the child cannot be placed with adoptive parents unless assistance is provided as determined by a state. The child must be a U.S. citizen or resident.
Although the participant won't save FICA on amount set aside in the take care adoption account, the employee will save federal and state tax (where applicable). The annual limit in 2013 for paycheck contributions to an adoption account is $12,970. The annual limit is phased out ratably in 2013 for participants with a household Modified Adjusted Gross Income (MAGI) of $194,580, and is completely phased out when MAGI reaches $234,580. Employees that expect to pay more than the annual limit for any single adoption attempt might want to take advantage of both a tax credit on IRS Form 1040 and let the take care adoption account pay additional expenses.