Tax Credit?

Not a dumb question...better to be informed! Yes, you get the $10,000 credit, but if you owed something, it would just come out of it, and you'd get the remainder as a tax return. However, we learned that for international adoptions, you get the tax credit only in the year you finalize - so we still have to wait til the end of this year. Jen

We have heard differing advice on wether or not we would be helped at all by the tax credit. Where is the best source of information to find out how our particular situation would be affected? Should we talk to an accountant? An adoption attorney? Someone at an adoption agency? (The one agency we have met personally with said it would most likely be worthless to us but her explanation of why just left us more confused!) We just want a reliable source of information since we have heard so many different things. We just want to know what we can count on as we come up with a budget for an adoption. Thanks for any help!!

Your best source of information is an accountant and the IRS itself. If you look up form 8838, both the filing form and the instructions, and publication 968 you will have a lot of your questions answered. You can also email questions directly to the IRS, and they do respond (I exchanged lenghty emails with one worker at the IRS two years ago when we dealt with this issue). Generally adoption agencies are reluctant to give tax advice since it can open them up to liability, and they are not accounants. Considering this credit when budgeting is tricky since it can be years before you are able to use the credit, you could spend the money one year and not be able to take the credit until two years later, as an example. A lot depends on the type of adoption, domestic or international, when you spend the money, and how long it takes to finalize. There are many variables to consider.

The other thing is that not everyone qualifies. If you make over about $200,000 (I forget the exact figure) you don't qualify for the tax credit at all. If your income is low enough that you don't owe any taxes at the end of the year, then of course you would also not be helped by the credit. If you fall in the middle, you would certainly be helped as it comes right off the bottom line of what you owe in taxes.

I'm going to repost something I posted earlier on these boards. 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.) 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 before 2004; 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, age 60 Mom to Rebecca born 10/18/95 adopted 5/5/97 Xiamen (Fujian prov.), China