[Archive]

Originally Posted By chieffan9

Shelly,
Let's take the same situation that I described earlier (it appears as though you fall in the same category).

Let's say that in any normal year, you add up your total income, take away all of your tax deductions (like mortgage interest, charitable donations, etc.), tax credits (like child credits, etc.), and other non-taxable income and you end up with a number. This is called your taxable income. Once you have this number, you can figure out how much money you SHOULD have paid the federal government in the past year. In my example, we used $5,000. In my example, your employer actually took out of your paychecks $7,000. This is why you get a return every year. Your employer is taking too much money out of your paycheck each month. This "extra" money is yours. This is not some sort of rebate or money that the government is giving back to you out of the goodness of their hearts. This money belongs to you, and they MUST give this back to you. This is why you get a $2,000 refund check in the mail every year (or whatever amount it is).

Now, here's the deal for adoptions and where I think you're getting confused. The TOTAL credit per adoption for federal tax purposes is $10,000. Let's say you have the same situation as before, except this year, you will spend $15,000 on adoption expenses. The government is saying that they will pay for $10,000 of those expenses through tax credits that can be taken up to five years after the adoption. Here's what that means:

1) you spend $15,000 this year on adoption expenses
2) on April 15, you send in your income taxes listing the same income, deductions, etc., as normal
3) you figure out that you SHOULD have paid the government $5,000 in taxes, but your employer actually paid them $7,000. This means that you will get your normal $2,000 refund
4) THIS IS WHERE IT DIFFERS: the government now says "Hey, Shelly, instead of paying us that $5,000 that you normally would have; please use it instead to pay off some of that $15,000 that you spent on your adoption expenses from last year because we think it makes the world a better place when people adopt children who normally wouldn't have a nice home." This is why instead of your normal $2,000 refund check, instead, you will get a $7,000 refund check. This consists of the $2,000 that your company overpaid the government in the first place, PLUS the $5,000 that the government is being kind enough to give back to you. In essence, you will not pay the government ANY taxes in that year!
5) Now here's where I think you might have gotten confused; the TOTAL CREDIT per adoption is $10,000. In this example, you have only received a credit of $5,000. This means that you now have a "carryover" or "extra" $5,000 that you will now attempt to collect over the next four years. If your tax return looks exactly the same, then in year 2, you would get another check for $7,000 for the same reasons as before. This would bring your total credit to $10,000 and you would be finished with the tax credit.

For people who only pay the government $2,500 per year, it would take them 4 years to recover their credit. Some people might be able to recover it in one year.

This is an INCREDIBLE deal! The federal government is virtually saying that they will pay 100% of your first $10,000 worth of adoption expenses. The only catch is that you have to come up with this money first, and then they will pay you back at tax time the following Spring.