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If you had not adopted, you would not owe any tax or get any refund, because you had exactly enough money taken out of your paychecks to cover your total tax obligation of $12,000.

Since you adopted, your total tax liability is reduced to $2,000, presuming that you are eligible for the full credit (e.g., that you had $10,000 in qualifying expenses paid after the tax credit increase took effect and that you don't make too much money). This means that you overpaid by $10,000. You will get the overpayment back or be able to apply some of it to next year's taxes.

Many families think that if they have only $6,000 of total tax liability in a given year, they will get a refund of the $4,000 credit that isn't used to offset it. This is false. If they have a total tax liability of $6,000, they can reduce it to zero by using $6,000 of their credit. The remaining credit may be used the following year, but will not be given to them as a cash benefit. If they have overpaid via their paychecks, they will get a refund of whatever was overpaid the first year. Otherwise, they will owe nothing and get nothing back that year. For example, if they wipe out their $6,000 tax liability, but have already paid $6,000 via their paychecks, they will get this money back; however, if they did not pay anything through their paychecks or estimated tax filings, they will not get any money back or owe any money. The following year will work similarly. They can use the remaining $4,000 credit to reduce their total tax obligation. Then, if they have paid in more than their reduced total tax obligation, they will get the overpayment refunded; if they have paid less, they will owe money.

Do remember that if any of your qualifying adoption expenses were paid back when the credit was only $5,000, these expenses will be treated differently from those paid since the credit was increased; you may not be able to take the full $10,000 credit.

If you go to the IRS website, you can download Form 8839 and its instructions and see for yourself how the tax credit will affect you. Sometimes, it's a good idea to do this even if you are going to be using tax software or a tax preparer.

Sharon

Sharon