[mig42]

Just wondering if adopting domestically when you can claim you tax credit.
We were under the impression that you couldn't file until after the adoption was finalized. We paid all our fees to our Agency last June but we're still waiting to be matched therefore we ASSUMED we weren't supposed to file for the tax credit yet. Were we wrong? Should we have filed this year since we paid out the money in 2007? We're scared now that we've missed the boat!!

[Acolo]

That's how I understand it, too. We adopted Ben and had finalization, everything in 2006. So, we claimed the credit for 2006 taxes (in 2007) even though we had paid some in '05.

[ProspectiveSingleMom]

That seems right. I haven't adopted yet, but the software I used to do my taxes has a question that says "Did you adopt a child in this year?" not "Did you pay fees for an adoption?"

[kindredspirit]

http://www.irs.gov/pub/irs-pdf/i8839.pdf

Here is the link to the instructions. Ask your tax accountant.

[beav]

That is right. We payed our adoption expenses in 2006 when our daughter was placed with us but did not finalize until 2007. We were unable to claim the tax credit until after we finalized which was on our 2007 taxes. We were able to do an amendment to our 2006 taxes and claim her as a tax deduction for 2006 after we finalized.

[DianeS]

The rule for domestic adoption expenses is this: You file for the credit in the year you finalize - or - in the year after you pay the expense - whichever comes first.

So, if you pay expenses in 2007 and finalize in 2007, then you get the credit on your 2007 taxes. And if you pay expenses in 2007 and do *not* finalize in 2007, you get the credit on your 2008 taxes (regardless of whether you ever finalize or not).

Hope that helps!

[the_t]

Not sure when you can claim the credit (ask your tax guy, or see prev posts). The good news is that you can file an Amended Return within 3 years. So, if you were supposed to claim last year, you've got 2 years.

[momofMikhail]

For a domestic adoption you can claim whatever you have spent that year. So if you spend 2k in 2007, you can claim 2K on your 2007 taxes. And if the adoption takes you into two years of taxes you can claim for both years, but only what you have actually paid out that year not the entire amount. For international adoption you can claim everything only once the adoption is finalized.

[ByChanceBaby]

We're baffled about how the "credit" actually works. Say we've paid out $8,000 in 2008 so far (domestic), but haven't matched yet. We claim this credit on our taxes at the end of 2008. When it's refund time, how does this credit work? If we normally get a little money back (because our employers takes out our taxes and we have a house, and some deductions), how will this credit work for us? Do we get more of a refund back, or would it be a "wash" because we usually get $2,000 - $3,000 back?

Can anyone explain this?

[DianeS]

Originally Posted by ByChanceBaby

We're baffled about how the "credit" actually works. ...

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.

[ByChanceBaby]

Diane - Thank you for the VERY thorough explanation! I think that really clarifies things. My only question is that I have read that in a domestic adoption, we can claim fees paid toward the same adoption in the year we paid the fees. In other words, since we are paying our adoption fees "monthly" until we reach the grand total for the agency fees, we will have actually paid out about $11,000 before year's end. I was under the impression that something like $11,000 of this could be claimed as adoption expenses for 2008, even if we don't finalize, and that the only situation where we'd need to have a finalized adoption to claim the credit is if it was an international adoption. If this is true, this would just mean that we would put these current 2008 expenses towards our claim for the credit, but if we had any credit left over it would carry forward... ??? right? Is this possible? Or are you certain it needs to be claimed in the year finalized? In our case, once we match, and once we finalize, then we pay the agency two more fees... of about $5,000 total....but since they would be a part of the same adoption, then I don't think we'd have any credit left to claim...... sorry, I think I'm making this even more confusing.

Thank you for your help!

[feelingreyt]

Jumping in later here, but just wanted to say that DianeS is correct on the tax credit laws.
ByChanceBaby,
If you pay $11,000 is 2008 but you have not finalized in 2008, then you must wait until 2009 to claim the credit. Whatever is left over may be carried over. Now, if in 2009 you pay an additional $10,000 AND you finalize in 2009 you will have $21,000 to apply to your tax credit. Now keep in mind that you are only offsetting your tax liability. So you may have alot or a little to carry over for the next few yrs. depending on your liability.
Now if in 2009 you claim what you spent in 2008, you haven't finalized, but you have spent say...$5,000 more. You will have to wait until 2010 to claim the $5000 you spent in 2009 because you did NOT finalize. Does that make sense?
Also, it doesn't matter what the overall cost of the adoption is, as long as you only claim what you actually spent, you can claim it. There is an exception to that rule though....If you adopt a special needs child then you can claim the maximum amount allowed the year you finalize, even if you spent $0 in adoption fees. The child does have to be considered special needs through the courts. Alot of times if you foster adopt, that child is considered to be special needs even if there is really no physical problem....Just food for thought!
Hope this helped!