refundable vs. non-refundable

Refundable means that you will get to take the credit regardless of what your total tax liability was for the year. For example, even if you paid $0 in federal taxes, you will get the credit as a refund. Non-refundable means that you can only take it up to the amount of your total tax liability. For example, if your total federal taxes for the year total $3,000, then you can only take $3,000 worth of credit. The remaining credit rolls forward and can be used for up to 5 years. Refundable is by far the better credit because it means everyone can take it, regardless of income (unless they make MORE than the upper income limit of the credit). Non-refundable credits tend to benefit higher income earners more because those who earn less oftentimes don't have a high enough tax liability to take the credit.

Thanks for explaining this. I was wondering about it. We don't have a whole lot of tax liability this year so it is great that we can take the credit in 2011 no matter what. We funded our adoption with personal savings, a 401k loan and credit card debt so this will definitely help! Also, we had a failed adoption last year. It was a really though thing to go thru for us, however, I was happy to know that you can also take the credit for failed adoptions.

Keep in mind that the expenses for the failed adoption need to be rolled into the credit for the finalized adoption (if you have one). For example, if you have failed adoption expenses of $5000 in 2011, then finalize an adoption also in 2011 with expenses of $15000, you need to add both sets of expenses together ($20000) for the tax credit. You don't get two tax credits unfortunately. Just wanted to be clear since it is a common misconception.

Well, that's debatable. That's the IRS interpretation of the law, although there's no evidence that this is what Congress intended.There are plenty of examples of parents on this board -- including me -- who had a failed domestic adoption, followed by a successful adoption, and claimed two credits but were not challenged (I was audited and my credits were not challenged). See [url=http://forums.adoption.com/adoption-finances/126472-failed-adoption-tax-credit.html]this thread[/url].I know that Mark McDermott ([url]http://theadoptionadvisor.com/)[/url], the DC attorney who helped draft the adoption credit statute, agrees with my position; he and my attorney exchanged several emails on the subject. The [url=http://www.adoptionattorneys.org/]AAAA[/url] also supports this position.Just the other side of the argument.