Federal Adoption Tax Credit

Let me just say that we are in a place where we weren't sure if our adoption was going to go through this year or not. AT this point I'm going to say NOT. However, because we weren't sure at the beginning of the year we talked about this quite a bit, so I'll share what we were thinking. DICLAIMER: I'm not giving tax advice. Just ideas we were talking about. As it is nonrefundable, it would basically end up paying any taxes you owe federally. Normally, we want to decrease the amount we owe at tax time, so we adjust our exemptions on our W-2's accordingly. This means we have more money in our bank account over the year, rather than a big refund at the end. Okay, with that in mind, and if this credit had applied to us for this year we would have adjusted our exemptions and withholdings the other way - so we would end up owing more money. There are several ways you can do this, depending on your particular situation. So, how would this help you? It could mean a few things: 1. more money coming home from your husbands paycheck (i.e. you would be paying less of your tax bill each paycheck and end up with more due at tax time, hence using your credit to pay the bill), 2. You could change over some of your retirement accounts so that you pay the taxes on the money now rather than when you withdraw them, and their interest earned would also be tax free withdraw time (yes, this one has a benefit further in the future, but it is there) or 3. Depending on other situations, you may come up with some other way to find to "use" the credit. It is probably too late in the year to do much with exemptions, though you can do stuff with retirement accounts into the new year. Talk to an investment person or tax person about that. Also, in years past this credit has rolled over from one year to the next. So if you don't use it up the first year, you have a few more to do so. However, knowing how things change, we plan on trying to take advantage of it immediately (i.e. in the year we first qualify) if possible. Good luck and congratulations.

What blueflower said. :-) Basically, does the IRS usually keep any of your money after you file your taxes? If they usually do, they won't this year - you'll get it back because of the Federal Adoption Tax credit. That's the point of the credit in a nutshell. If the IRS normally does not keep any of your money (because you get it ALL refunded anyway) then the Federal Adoption Tax Credit does not help you. It's lousy that way. So you basically do your taxes like normal, and see how much money the IRS will be keeping. Then you apply the amount you get from the credit, and watch the amount the IRS would have kept dwindle down to zero. And you will probably have some of that credit left over to use next year. And the year after that. And the year after that. And the year after that. And the year after that. The original year plus five more, or until you have used the entire credit, whichever comes first.

Here's what I posted on your other thread. "When a tax credit is nonrefundable, that means that your tax liability can only be lowered to 0, not to a negative number. Generally speaking this means that you can only receive back what you pay in. For example, if you have only paid in $6000 in taxes, you can't receive $12,500. You'll get $6000 and roll the remaining credit to the next tax year.Additionally, for us, we had to show that we had spent that money in acceptable adoption expenses.I'm speaking from experience with domestic infant adoption - I don't have any experience with the special needs criteria that can operate differently than what I'm stating."Keep in mind that you can roll the unused portion of the credit to next year if needed. So if you only were able to apply 3000 of the tax credit this year, you can roll the rest to next year.It doesn't hurt to have an accountant help although you should be able to do it with any of the tax software's that you use at home.

:) With the credit going through FC it is a bit different, as often we don't have a lot of expenses, if any at all, related to the actual adoption. For us there are no directly related expenses. That state pays for the lawyer and all the paperwork. However, the kids are usually (not always) considered "special needs" which means we automatically get the full amount. It is just one of the small differences with going through FC rather than a domestic adoption.

Thank you everyone for your responses! I think I have a good grasp on it now. Our children are both considered special needs in our state & it's documented in their respective subsidy agreements. We can claim roughly $13,000 per child. Hypothetically, lets say our tax liability is $10,000 and our federal income withholding was $15,000. *If I understand correctly* under normal circumstances we would get a return of about 5K, but because we have the nonrefundable adoption credit this year, that could apply to the 10K tax liability, and our refund could be the full 15K. As we can not get a refund of more then we owe, we have a "balance credit" of 16K that can be used for up to 5 years until the credit it depleted. Sound right? I hope so, lol. I've read that over 90% of the adoption tax credits are audited by the IRS, leading to delayed refunds. Someone recommended filing taxes as usual and then amending the tax claim afterwards to ensure that a regular refund is not held up in red tape. Any advise on that? Thanks again!

Yes, that's how the carryover works. The credit applies to the tax liability. And once you reach 0 the remaining carries over to the next year. I don't agree with the 90% audit number. A high number are audited but it's not that many. We weren't audited. I would expect that amending your taxes would increase the risk of an audit rather than decrease it. Just file it correctly and take your chances. We filed on April 15th last year and got our refund in July. Adoption tax credits are processed manually, so you have to mail a paper return and it takes longer because of that. I know people on here that filed early and got their refunds quicker. Only a few people on here had to supply additional paperwork. And I think 1 got audited.

sorry to sound stupid but we have a placement we are considering adopting..... although legally we could have done so dec. 6 we decided to wait til next year (maybe spring). She is thru FC. we will not have any expenses because county we are going thru pays everything (we will have no upfront expenses). Once she is adopted we were told we will still get a monthly stipen. So would we be able to benefit from any adoption tax credit even though we wont have any expenses associated with it?

Thanks, I appreciate the help.

If the child is documented as "special needs" in your subsidy agreement (you may not have this yet, but you must have it in your possession prior to adopting) you are automatically eligible for the full tax credit, even if you never spent a penny. If your foster child is not documented as special needs you can only get a credit for the amount you spent out of pocket. If you have no expenses, this credit won't apply to your family.The monthly stipend you are referring to is commonly known as the adoption subsidy. The amount varies greatly by state & county. You will generally receive this amount until the child turns 18. There is a basic rate that will be offered to you, however if your child has special needs (ie excessive medical/therapeutic needs, learning disorders, severe behavior problems) I encourage you to request an enhanced amount. I've worked as an adoptions case manager for 5+ years, and providing an enhanced amount helps tremendously for a family to maintain normalcy, especially if you are working parents & need to take a lot of time off from work for your child.Additionally, many states offer "medical subsidy" or something like it that help assist families with short term financial assistance. Basically if your child has a per-existing condition prior to the adoption finalizing (i.e. ADHD) and could benefit from a service not covered by Medicaid (i.e. specialized summer camp, additional therapeutic services) then you can request reimbursement from the agency/county. Lastly, about 14 states offer their own adoption tax credit, some are 1 time only, some annually. Good luck on your journey!