Please explain the adoption tax credit to me

[LessTraveledBy]

From a website I was reading:

"The credit is now refundable. This means that even families that owe zero taxes can receive the full tax credit in the form of a tax refund to help with their adoption-related expenses."

I am a bit confused as to who can receive the tax credit... Anyone living in the USA legally? Anyone still filing taxes even if not living in the USA? Can anyone give me an example of a person paying 0 in taxes but still being able to receive the full tax credit? I mean even unemployed people pay taxes, right, so who do not?

I guess I am a bit confused as to why this is connected to taxes, if you can get it whether you pay taxes or not. Why not just pay the money as a grant or something to all the people who adopt?

Yes, I am not a citizen, though DH is. You can see I know very little about the system there.

[mariaz]

I'm not going to be able to give you a ton of detail but here is what I know--

A lot of Americans do not have a tax liability, meaning that at the end of the year they will not owe the government any additional taxes than what they have paid in throughout the year and most without tax liability are eligible for tax refunds.

My family, for example, gets a large tax refund after taxes every year because we qualify for child tax credits and some years for the earned-income tax credit (basically a refund for working but still living on a low income). We have never been able to claim the adoption tax credit before as we have never owed any money (and the credit used to be only available if you could apply it to an end of the year tax liability). This year we will be able to claim the adoption credit as it has now become fully refundable for any adoptions completed within the last five years. 

[Polliwog]

Here's a good explanation.  There's links to the IRS documents, too.  http://taxes.about.com/b/2010/10/04/enhanced-adoption-credit-for-2010.htm 

[AllyRae]

It won't always be refundable either.  Our 2007 credit wasn't refundable (although i guess it would have been now, but we used ours all up).  Once 2011 ends, it will go back to being non-refundable.  (I totally don't agree with Obama making the last 5 years refundable because that money has to come from somewhere...and giving people back $12,000 that never paid that money in the first place just adds a whole lot more to the national debt.  I would have preferred he just make this year's refundable as part of a stimulus, but leave all past years alone.  But hey, it helps out some people, and will likely lead to more little ones finding families, so it can't be all bad.  Just not the best financial move for the government.  I kind of wish we would have gotten that big lump sum though. LOL!).  We're looking at completing our next adoption in 2012 (barely...we should be travelling around next January, which will put us out of the refundable category by a few weeks. Doh.)...the credit we would receive will *not* be refundable, and will revert back to the 2009 $12,000 non-refundable credit that can carry over a few years.

[Polliwog]

I'm VERY happy that it's both retroactive and refundable.  I'll be able to finally claim DS's (from 2008) and DD's (from last month.)

[LessTraveledBy]

Originally Posted by AllyRae 

It won't always be refundable either.  Our 2007 credit wasn't refundable (although i guess it would have been now, but we used ours all up).  Once 2011 ends, it will go back to being non-refundable. 

OK, so it is already known and sure that it will not be refundable after 2011?

:( That is the only way we could ever afford to adopt, so this is really bad news. So thank you, good thing I know that now. We are in the very beginning stages here, so there is no way anything would be finalized in 2011, 2012 or 2013, the earliest, maybe even later. TBH, I was really not expecting to get anything, so in that sense it is ok. However, that means I will need to let go of any thoughts about adoption in the next 3-5 years. And, after that, dd and we will be pretty darn old to be starting the process.

I find these rules really unfair for those who finalize their adoption, say 1/1/2012, versus a day earlier. It is not like the length of the process is up to the people adopting, so I bet there will be quite a few nervous couples around that time. The people not paying enough taxes to be able to use the whole tax credit are the very ones that would need the refundable credit the most. This sends a pretty clear message that they should not adopt, even though they may well be making less due to a SAHM, etc. It is one thing if you know you can pay off a loan next year, vs. in five years or whatever.

Back to reality it is, for me. Sorry about the rant. I am just sad.

[AllyRae]

I guess I don't know for sure, but there were some people on the China boards that had talked to accountants and found out that it was the Bush tax credit that was extended, and not the Obama one...the Obama one is still supposed to sunset at the end of 2011.  The Bush one ($10,000 increased for inflation, and can carryover 5 years) was the one that was extended. 

It's kind of disappointing for me too.  We will get the entire credit back in 5 years, BUT, it sure makes it easier to pay things off if you get the entire credit at once as a refund.  The China Special Needs program is touchy--some people finish in under a year, but some don't...and with us starting the process next month, that puts us at finalizing during the Thanksgiving/Christmas/New Year/Chinese New Year time, which involves a lot of government office closures between the two involved governments.  It very likely means we will finalize after the new year unless the stars align and somehow we manage to hit absolutely no delays ever (some people make it through the process in 9 months, but the average is 12-18...and you never know when the next big slow-down will happen either).  And of course, with everyone trying to complete their adoptions before the refundable credit expires, there is likely to be a huge slowdown at the end of next year anyhow.

I wish they would have a clause like they do for domestic adoption where you get the refund in the year you make the payments (so if the bulk of your adoption is paid for by the new year, you'd get to claim it)...or that they grandfathered in people who started the process before the law change.  That'd be helpful. LOL!

[Polliwog]

As far as I know, there has been no word about the ATC beyond 2011.  It was due to sunset and go back to the @$5,000 that it was years ago.  But then it was tacked onto the Health Care bill.  I doubt that it will go that far down, though.  I suspect that it will no longer be refundable but the amount either stay the same or go up another $1,000. 

[AllyRae]

Originally Posted by Polliwog 

As far as I know, there has been no word about the ATC beyond 2011.  It was due to sunset and go back to the @$5,000 that it was years ago.  But then it was tacked onto the Health Care bill.  I doubt that it will go that far down, though.  I suspect that it will no longer be refundable but the amount either stay the same or go up another $1,000. 

 It was extended an additional year (the Bush era version) in the tax bill that just passed last week. :)  So from 1/1/12-12/31/12, it will go back to the $10,000 adjusted for inflation (which, in 2007, it was around $12,000).

[LessTraveledBy]

 It was extended an additional year (the Bush era version) in the tax bill that just passed last week. :)  So from 1/1/12-12/31/12, it will go back to the $10,000 adjusted for inflation (which, in 2007, it was around $12,000).

Sorry, this is all SO new to me. Are you saying that the families will get the $10 000 in one year (refundable) or that it is back to the claim it as you pay taxes in 5 years?

The difference is huge for us, as we are at the moment abroad and dh plans to work in the US  some time "soonish." He is studying in Europe, so he is not working there full time and we would get very little back if it is not refundable. I guess I can go and research it but it is just so emotional for me, and I need to try to celebrate Christmas with dh and dd.

Hope, no hope, hope, no hope? Hah... It is a rollercoaster and we have not even started yet.

[Polliwog]

In January 2012, it will go back to being a non-refundable tax credit that can be used over a six year period.  After that it will likely be non-refundable and you would have the six years to use it up or lose it.   I don't know your story, but there are lower cost ways to adopt a child.  I adopted two of my foster children and DS's adoption cost me $50 and DD's adoption was $90.

[LessTraveledBy]

Originally Posted by Polliwog 

In January 2012, it will go back to being a non-refundable tax credit that can be used over a six year period.  After that it will likely be non-refundable and you would have the six years to use it up or lose it.   I don't know your story, but there are lower cost ways to adopt a child.  I adopted two of my foster children and DS's adoption cost me $50 and DD's adoption was $90.

Thanks! I am still confused, though... What is the difference between 2012 and later, as we know now? Am I wrong to think that you basically described the same situation twice (6 year period, non-refundable), both for 2012 and after?

Can the tax credit be claimed by the adoptive parents, only, or could someone else claim it, assuming that person had donated to the doption at least the amount of the tax credit?

The problem is that we are not in the USA. Thus foster to adopt, for example, is not possible for us. Our options, it looks like, are domestic infant adoption and int'l from a non Hague country. (Due to the country we are living in right now making things really complicated.)

Edited by LessTraveledBy - 12/25/10 at 12:12am

[AllyRae]

Originally Posted by LessTraveledBy 

Originally Posted by Polliwog 

In January 2012, it will go back to being a non-refundable tax credit that can be used over a six year period.  After that it will likely be non-refundable and you would have the six years to use it up or lose it.   I don't know your story, but there are lower cost ways to adopt a child.  I adopted two of my foster children and DS's adoption cost me $50 and DD's adoption was $90.

Thanks! I am still confused, though... What is the difference between 2012 and later, as we know now? Am I wrong to think that you basically described the same situation twice (6 year period, non-refundable), both for 2012 and after?

Can the tax credit be claimed by the adoptive parents, only, or could someone else claim it, assuming that person had donated to the doption at least the amount of the tax credit?

The problem is that we are not in the USA. Thus foster to adopt, for example, is not possible for us. Our options, it looks like, are domestic infant adoption and int'l from a non Hague country. (Due to the country we are living in right now making things really complicated.)

After 2012, it's set to go back to $5000, still non-refundable.  BUT, it keeps being extended, so the chances of it going down to $5000 is slim...

Only the adoptive parents can take the credit.  If you do a domestic adoption in the US, you can claim the credit the year you spend the money, regardless of what year you finalize (so you can claim the credit before the adoption is finalized).  If you do an international adoption, you claim the credit the year the adoption is finalized, no matter when you spend the money (so you can spend money over the course of 2010 & 2011, and then finalize in 2012, but you couldn't claim the credit until after you finalize...the reason for this is that the credit can only be given if the child is a US citizen, so you have to wait until after the finalization to get that credit, whereas in a domestic adoption, the child is already a citizen at birth).  But, as far as I know, you have to be the adoptive parent to get the credit.

Now, *when* an international adoption is finalized differs for each country.  When I adopted from Vietnam, a non-hague country, the finalization happened in Vietnam and she became a citizen when we touched ground in Chicago due to the fact that both parents travelled and saw DD in country--had only one of us travelled, the finalization would have happened in the US due to visa regulations.  In China, only one parent has to travel for the finalization to happen in China due to Hague regulations, so even if only one of us travelled, it would be considered final for tax purposes in China.  I'm not sure how it works in Korea where adoptions aren't finalized for quite some time after the adoption happens.

[Polliwog]

Originally Posted by LessTraveledBy 

Originally Posted by Polliwog 

In January 2012, it will go back to being a non-refundable tax credit that can be used over a six year period.  After that it will likely be non-refundable and you would have the six years to use it up or lose it.   I don't know your story, but there are lower cost ways to adopt a child.  I adopted two of my foster children and DS's adoption cost me $50 and DD's adoption was $90.

Thanks! I am still confused, though... What is the difference between 2012 and later, as we know now? Am I wrong to think that you basically described the same situation twice (6 year period, non-refundable), both for 2012 and after?

Can the tax credit be claimed by the adoptive parents, only, or could someone else claim it, assuming that person had donated to the doption at least the amount of the tax credit?

The problem is that we are not in the USA. Thus foster to adopt, for example, is not possible for us. Our options, it looks like, are domestic infant adoption and int'l from a non Hague country. (Due to the country we are living in right now making things really complicated.)

I'm sorry if I wasn't clear.  It's Christmas and I'm not multitasking well.  But, thanks for explaining your situation.  It sounds like you won't benefit from the ATC as much as you would if either you or your DH were working more.  Until the current changes, I wasn't able to touch Chris's ATC.  It is what it is.  I haven't been working much and had no tax liability.  Is moving back here an option?

Originally Posted by AllyRae 

Originally Posted by LessTraveledBy 

Originally Posted by Polliwog 

In January 2012, it will go back to being a non-refundable tax credit that can be used over a six year period.  After that it will likely be non-refundable and you would have the six years to use it up or lose it.   I don't know your story, but there are lower cost ways to adopt a child.  I adopted two of my foster children and DS's adoption cost me $50 and DD's adoption was $90.

Thanks! I am still confused, though... What is the difference between 2012 and later, as we know now? Am I wrong to think that you basically described the same situation twice (6 year period, non-refundable), both for 2012 and after?

Can the tax credit be claimed by the adoptive parents, only, or could someone else claim it, assuming that person had donated to the doption at least the amount of the tax credit?

The problem is that we are not in the USA. Thus foster to adopt, for example, is not possible for us. Our options, it looks like, are domestic infant adoption and int'l from a non Hague country. (Due to the country we are living in right now making things really complicated.)

After 2012, it's set to go back to $5000, still non-refundable.  BUT, it keeps being extended, so the chances of it going down to $5000 is slim...

Only the adoptive parents can take the credit.  If you do a domestic adoption in the US, you can claim the credit the year you spend the money, regardless of what year you finalize (so you can claim the credit before the adoption is finalized).  If you do an international adoption, you claim the credit the year the adoption is finalized, no matter when you spend the money (so you can spend money over the course of 2010 & 2011, and then finalize in 2012, but you couldn't claim the credit until after you finalize...the reason for this is that the credit can only be given if the child is a US citizen, so you have to wait until after the finalization to get that credit, whereas in a domestic adoption, the child is already a citizen at birth).  But, as far as I know, you have to be the adoptive parent to get the credit.

Now, *when* an international adoption is finalized differs for each country.  When I adopted from Vietnam, a non-hague country, the finalization happened in Vietnam and she became a citizen when we touched ground in Chicago due to the fact that both parents travelled and saw DD in country--had only one of us travelled, the finalization would have happened in the US due to visa regulations.  In China, only one parent has to travel for the finalization to happen in China due to Hague regulations, so even if only one of us travelled, it would be considered final for tax purposes in China.  I'm not sure how it works in Korea where adoptions aren't finalized for quite some time after the adoption happens.

I don't think it will go back to $5000 either.  The goal is to get children permanent homes and out of foster care and orphanages. Which is a big reason why the full ATC is available to people adopting special needs children from foster care even though there aren't qualifying adoption expenses.  Drastically cutting the ATC would prevent a lot of people from adopting. 

And the ATC is only available to the child's parents since they are the ones claiming the child as a dependent.

[LessTraveledBy]

Thanks, everyone! Seems pretty clear now.

We are not able to move there for another 3 years, so it does not look as if this is going to help us. I don't think there are any places where you can go from nothing to finalizing within 2011. (Other than domestic, if one got really lucky.) Our home study, alone, would take 2-3 months to be ready after the home visit and we are not even ready to book that. The fastest int'l, as far as I know, is a country that does not accept us due to religion and we are not going to lie!

In a sense I don't know that anyone should be able to have an adopted child "rally fast", anyway, just like we can't skip over the 9 months of a pregnancy. This financial thing is just really hard to try to figure out. Or maybe my issue is simply that I don't want to accept a "No, not going to happen."

In order to understand this better, I just started to google this. Is the info here just really wrong? http://taxes.about.com/od/deductionscredits/qt/adoptioncredit.htm There seems to be some confusion online about 2012 and whether the credit is refundable. I am going to try to find the actual document and get through it.

Edited by LessTraveledBy - 12/25/10 at 9:08am

[mamamace]

Hi, I just found this thread and joined this forum!  I love this mag!

Anyway, same question here about 2012 being refundable vs non-refundable.  HUGE question for us in determining if we will proceed!

about.com article says YES, but here, http://www.thetaxinstitute.com/pdfs/2010_QRC_01122011_final_BW.pdf

they say NO.  Has anyone found out more info or talked to a tax preparer who actually knows what's going on?  I called a place today and I knew more than they did!  Yikes!

Thank you!

[Polliwog]

Knowing more than tax preparers is VERY common. It happens all the time with foster and adoptive parents. The ATC is refundable for children adopted in 2010 and 2011 but there is no word about future adoptions.  I'm not sure it's been addressed by Congress. 

[MissinNYC]

Warning: Spoiler! (Click to show)

OK, so it is already known and sure that it will not be refundable after 2011?

:( That is the only way we could ever afford to adopt, so this is really bad news. So thank you, good thing I know that now. We are in the very beginning stages here, so there is no way anything would be finalized in 2011, 2012 or 2013, the earliest, maybe even later. TBH, I was really not expecting to get anything, so in that sense it is ok. However, that means I will need to let go of any thoughts about adoption in the next 3-5 years. And, after that, dd and we will be pretty darn old to be starting the process.

But it shouldn't make a difference if you are going to spend money to adopt, right? Say you spend 10k on an adoption, out of pocket. You then get back the 10k off your tax bill. 

[Polliwog]

Originally Posted by MissinNYC 

Warning: Spoiler! (Click to show)

OK, so it is already known and sure that it will not be refundable after 2011?

:( That is the only way we could ever afford to adopt, so this is really bad news. So thank you, good thing I know that now. We are in the very beginning stages here, so there is no way anything would be finalized in 2011, 2012 or 2013, the earliest, maybe even later. TBH, I was really not expecting to get anything, so in that sense it is ok. However, that means I will need to let go of any thoughts about adoption in the next 3-5 years. And, after that, dd and we will be pretty darn old to be starting the process.

But it shouldn't make a difference if you are going to spend money to adopt, right? Say you spend 10k on an adoption, out of pocket. You then get back the 10k off your tax bill. 

If the tax credit becomes non-refundable again, then what someone will get back is based on their tax liability.  If they don't have $10,000 of tax liability (over a six year period,) then they can't get that much back.  In my case, DS was adopted in 2008 but I haven't touched any of his ATC until this year.

[Alvenchrst]

I have a question, if you adopt a special needs child, as we are in the processes of doing, but there are some good chances we won't finalize in 2011, would that make the tax credit always refundable for us regardless of our tax liability (which is zero.) ??  I thought I had heard this somewhere along the way but wasn't sure.  I know that when preparing tax returns for an adoption it specifically asks if it was a special needs adoption so I wondering if this lends credit to the special needs/refundable exclusion I had heard about.  Thanks for any info!!