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Originally Posted by ByChanceBaby
We're baffled about how the "credit" actually works. ...
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First, a lesson on when you get to claim the credit. If yours is a domestic adoption, you can claim the adoption tax credit in the year you finalize the adoption, or in the year after you pay the fees, whichever comes first. So for fees paid in 2008 - if you finalize in 2008 you can claim the adoption tax credit when you do your 2008 taxes. But if you don't finalize in 2008, you will have to wait until you do your 2009 taxes to claim the adoption tax credit for expenses paid in 2008.
Second, how it works:
The adoption tax credit works with your *tax liability* - the amount of your money that the IRS keeps each year.
Most people in the USA have taxes taken from their paycheck. Then on April 15 when you mail your tax forms, you tell the IRS how much of that money you will receive back because you overpaid. That's probably the situation you're in. For instance, you may pay $6,000 in taxes through paycheck deductions, and receive $2,000 of it back.
Make sense so far?
That means the IRS may still have $4,000 of your money. THAT is the money that you may be able to get back by using the adoption tax credit.
So if you paid $9,000 in qualifying adoption expenses, then the year you get to claim those, you could get back the entire $4,000 the IRS would normally have kept, and you'd have $5,000 left over to use with the adoption tax credit next year. The IRS would send that $4,000 back to you in the same form they send the $2,000 overpayment back to you (check, direct deposit, etc).
However, there are some people who already get back everything they IRS takes out in paycheck deductions. They might have high medical expenses, a lot of child credits, a high deduction for their mortgage, etc. If the IRS does not normally keep any of your money after they refund the $2,000 that you overpaid, then your tax liability is zero, and the adoption tax credit won't help you.
Does that make sense? Feel free to post back if it doesn't.