Adoption Tax Credit?

[Stayseeliz]

Can someone explain to me how the credit works? I'm getting a lot of different answers. This is our situation:

DH is the sole source of income. He makes in the mid 30s. There are four of us living on that income so we typically get around a $4,000 refund every year on our taxes. We use this to pay bills, put in savings etc.

If we have no tax liability at the end of the year can we still claim adoption related expenses and get anything back or do you only get $$ back if you owe IRS at tax time?

We're just concerned about taking out a loan and thinking we're going to get the money back at tax time when we might not really get anything above our regular refund..Does that make sense?

Thanks for any help!!

[alicia622]

From how I understand tax credits, the credit is not based on your refund amount. So, if you take a loan and spend 10,000 you would be getting the 10,000 back (minus whatever taxes you might owe otherwise). http://www.irs.gov/taxtopics/tc607.html

[dharmamama]

My understanding of the tax credit has always been murky at best, but it is my understanding that the credit IS based on your tax liability. You cannot get back more than you paid in federal taxes. Unless you have a massive income (in which case you wouldn't qualify for the tax credit anyway) you wouldn't get $10,000 back all at once. You have five years to claim the total of $10,000 (or thereabouts; last I heard it was $10,160).

For example, the first year we took the tax credit, we got back over $4,000. Last year, because our tax liability was lower due to more dependents, we only got back $2750.

Namaste!

ETA: The second sentence of the page linked above reads "The adoption credit is an amount subtracted from your tax liability."

[Stayseeliz]

Thanks for the help. The adoption counselor we're working with told us if we didn't have a tax liability we would get all $10k back but that sounded strange to me. We usually have no liability at the end of the year. This is really confusing!!!

[dharmamama]

Originally Posted by Stayseeliz

We usually have no liability at the end of the year. This is really confusing!!!

I think I misunderstood what you meant by "liability." If you pay taxes throughout the year, you can get a tax credit. We never "owe" at the end of the year; we usually overpay throughout the year and have a refund coming anyway. If you pay any taxes during the year, you can qualify for the tax credit. But, when you file your taxes, if all your other deductions equal or exceed what you actually paid in tax during the year, you don't get the tax credit on top of that.

So, the first year we got the tax credit, our itemized deductions equalled (let's say) $3000. We got to take $1000 in tax credit, and that $4000 was all we could get back because that's all we paid.

Does that make sense or am I being as clear as mud?

Namaste!

[Stayseeliz]

No I think I'm confusing myself!! Okay I checked last year's taxes..We paid in at $4,000 and got about $3900 back on our refund. If the same thing happened next year we wouldn't be able to take the tax credit, right?

I'm just confused because we're being told that you can get all $10k back at one time if you don't owe the government anything but that doesn't sound right either!!

[Elowyn]

OK, deeeeeeep breath everyone.

Here's how it works:

1) You pay in (over the course of the year) X number of dollars to Uncle Sam. Let's say $4000 for the sake of discussion.

2) You adopt your child in 2006. (Date of finalization of adoption, which will vary by domestic/international/etc.) It costs you more than $10630. If less than $10630, your credit is for the amount of your expenses.

3) When you file your taxes, you claim the tax credit on your 2006 taxes (filed in April 2007.) In due time, you receive back the $4000 that you paid in. Obviously, you have some deductions in there too, so it's my understanding (but check w/ your tax professional on this) that you take the tax credit in the amount of the difference between your actual tax liability and your deductions. That is:
Paid in $4000.
Tax liability before deductions $3500
Deductions $1000
Tax liability after deductions $2500 (so in a "normal" year you'd get $1500 back.)

The tax credit erases your final liability, so you're taking $2500 of the tax credit on your 2006 return, meaning you'll get $4000 back from the feds (all that you paid in.)

4) Any amount of the $10630 maximum that is "left over" ($7500 in this example) can be carried over to apply to your tax liability after deductions in future years. So you can use $2500 in 2007, 2008, etc.

5) There is a maximum income limit - I'm not sure what it is (doesn't apply to me - it's greater than $100K) so those making over $100K should find that out.

Oh, and your Social Security, Medicare & Self-employment taxes don't get credited (sadly) and you can't get back more than you paid in.

Clear as mud?

[Stayseeliz]

Okay I think I got it. We'd still get our tax return back then the amount of our tax laibility which looks like it was around $1200 for last year. I *think* I understand now!! Thanks!!!!

[sak9645]

I'm going to repost something that I posted to another forum. Please note particularly the section on total tax liability, as you are misunderstanding the concept. It does NOT mean how much you have to pay on April 15 or how much you get back because you overpaid during the year. It means the total amount you owe, based on your income, BEFORE you consider how much of it you already paid through your payroll deductions or estimated tax filings.

For more detail, download from the IRS website the Adoption Tax Credit Form 8839, the Instructions to Adoption Tax Credit Form 8839, and Tax Topic 607. I'm not an accountant, so you may want to talk with your tax adviser and look at some tax software, as well.

The adoption tax credit is available to most adoptive families. It doesn't matter whether you adopted domestically or internationally.

The rules are a little different for international adoptions (whether of healthy or special needs children) versus domestic healthy child adoptions, versus domestic adoptions of children with special needs. The tax credit is per child. If you adopt two children at the same time, you can get two credits, as long as you meet the requirements below.

I'm going to go through the process for international adoption. Someone can pipe up and highlight the differences for domestic adoption, if he/she wishes.

Basically, to be eligible for the tax credit, you must fulfill ALL of the requirements below:

a) Have had a full and final adoption. If your child comes home on an IR-3 visa, meaning that both spouses in a married couple, or a single parent, saw the child prior to the overseas finalization, the IRS -- like the USCIS -- considers the adoption to be full and final in the year you bring your child into the U.S., so you can take the credit in that year. If your child comes home on an IR-4 visa, the IRS -- like the USCIS -- does not consider your adoption to be full and final until you have readopted your child in your home state or, where it is allowed, obtained state "recognition" of your child's foreign adoption, and you cannot claim the credit until the year in which the readoption or recognition occurred. You CANNOT claim the credit for expenses occurred in a failed adoption, like you can with a domestic adoption.

b) Have incurred some qualifying adoption expenses. If you have incurred at least $10,390 in qualifying adoption expenses, and most internationally adoptive parents do incur at least that much, you can claim the full tax credit if you meet all the other qualifications. (The $10,390 figure adjusts each year due to inflation and this is actually the 2004 figure.) If you have incurred less than $10,390 in expenses, you can claim part of the tax credit, if you meet all the other qualifications. Note that you could have incurred these expenses in years before you finalize; it doesn't matter.

c) Have adjusted gross income (AGI) of less than $195,860. If you earn over that amount, you cannot claim the tax credit at all. If your AGI is less than approximately $150,000, you can take the full credit, if you qualify in all other ways. If you earn between that amount and $195,860, you can take partial credit.

Here's how the credit works:

First, get comfortable with the concept of "total tax liability". On your 1040 tax form, whether or not you are adopting, there will be a place where you figure how much tax you owe in total, based on your income and deductible expenses. It is calculated BEFORE you figure out how much you already paid of that tax via your payroll deductions or estimated tax filings, and whether or not you will have to pay anything or be able to get a refund on April 15.

The adoption tax credit simply reduces your total tax liability by $10,390. If you don't have $10,390 in total tax liability in the year you claim the tax credit, you can carry the unused credit forward for five additional years.

Let me give you some examples. I will assume here that the person qualifies for the full tax credit, based on income and such, for one child. I will use the male pronoun, simply to avoid the cumbersome "he/she". The tax credit, of course, can be taken by a single person (male or female), or by a married couple filing jointly. Consult your tax advisor if you are married and filing separately. I will also use round figures, such as $10,000, rather than the actual numbers like $10,390.

a) A person's total tax liability, without considering the tax credit, is $10,000. He paid the full $10,000 of this through payroll deductions for taxes during the year. If he had not adopted, he would not have owed any money on April 15 and would not have gotten any refund. Since he adopted, his total tax liability is reduced to zero. Therefore, he overpaid his taxes by $10,000, through his payroll deductions, and this amount will be refunded to him.

b) A person's total tax liability, without the tax credit, was $10,000. He paid $8,000 of this amount through payroll deductions during the year. If he had not adopted, he would have owed $2,000 on April 15 (the difference between tax liability and amount paid). Since he adopted, his total tax liability is reduced to zero. Therefore, he overpaid by $8,000, which will be refunded to him.

c) A person's total tax liability is $10,000. He did not pay any tax through payroll deduction or estimated tax filings during the year. If he had not adopted, he would have owed $10,000 on April 15 (plus, probably, some penalties for underwithholding tax). Since he adopted, his total tax liability is reduced to zero. He does not owe any tax and he does not get any refund.

d) A person's total tax liability is $10,000. He paid $12,000 through payroll deductions. Normally, if he had not adopted, he would have received a refund of $2,000, since he overpaid his taxes by that amount. Since he adopted, his total tax liability is reduced to zero. Since he paid $12,000 through his paychecks, he will get, instead, a refund of the full $12,000.

e) A person has a total tax liability of $6,000. He paid the full amount through his payroll deductions. Normally, he would not owe anything on April 15, and would not get a refund. Since he adopted, he can use $6,000 of the tax credit to reduce his total tax liability this year to zero. That means he overpaid his taxes by $6,000 and will get that amount as a refund. In addition, he has $4,000 of unused credit to carry over to next year's taxes.

A person has a total tax liability of $6,000 and did not pay any taxes through payroll deduction during the year. Normally, he would owe $6,000 on April 15, and, probably, a penalty for underwithholding. Since he adopted, he can use $6,000 of his credit to reduce his tax liability to zero. Therefore, he would owe no tax this year. He also has $4,000 of credit to use next year.

The bottom line is that the tax credit is a big help to many taxpayers. It can either increase their refunds or reduce the amount of tax they must pay.

I hope this is helpful.


Sharon

[Elowyn]

: Sharon's absolutely right, and said what I tried to, in a much more coherent manner. Good job, Sharon!!