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Hello, We are considering taking a loan out for our international adoption. The loan program states that when we get our Tax Credit we could use that to pay back the loan. Can anyone shed some light on this for us? Is the tax credit an actual 10K payment to you when you file your taxes or is it taken as as line item deduction and you may or may not recognize the full benefit. If you could tell me your experience with this and how you benefited we would appreciate it. Thanks in advance, Scott
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The adoption tax credit is a reduction in the amount of tax money you owe in the year(s) following an adoption.
The easiest way of understanding it is to grab a previous year's tax return. Do you have one, like the one you probably filed last month?
Look down near the end, at the line about your total tax liability. (The number you looked up in the tax tables.) That's the amount of money the IRS wanted from you. You may have paid it already, from paycheck deductions, or you may have sent the IRS a check along with your forms. You may have gotten some money back from the IRS, but that would have been because you already paid over the amount in the tax table. Got it? That dollar amount in the tax table is the amount the IRS says you owed for that year.
THAT is the dollar amount that is reduced because of the adoption tax credit. The adoption tax credit will allow you to subtract up to the amount of the credit from the amount of your tax liability.
So, let's assume the amount of your tax liability is $5,000, and you paid that amount through the year with paycheck deductions, so the IRS already has it. You'll get all $5,000 mailed back to you by the IRS.
Now, let's assume the amount of your tax liability is $5,000, and you paid $8,000 through the year with paycheck deductions, so you already were expecting a $3,000 refund. You'll still get your $3,000 refund, PLUS your $5,000 back because of the adoption tax credit.
Finally, lets assume the amount of your tax liability is $5,000 and you expect to mail in a check for $5,000 because you paid nothing in paycheck deductions that year. Because of the adoption tax credit, you don't have to mail in the check, you get to keep it.
Make sense? So you'll have money to send the loan company ONLY IF you normally have a tax liability $ amount. Almost everybody does, but sometimes it is so small that it won't make a difference. So haul out a previous year's tax return, and see how much money you'd have had to pay that loan back if you had adopted that year. It could be enough to make the loan worth it, or it could be so small that you'd still have a ton of loan to pay in a different way.
Hope that helps!
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