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Originally Posted By baby2

hello. we are adopting a baby in may of this year 2002. How does the tax credit work? Do we get a cheque for 10000 dollars/ Or does my husband not pay any taxes until he reaches the 10000 mark. Also if we are only out 7000 dollars on the adoption is that all we get or is it 10000 regardless of what we are out. Please some one can you give us in simple terms answers to my questions Email me bernie.rivers@home.com Thankyou so much

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Originally Posted By chieffan9

baby2,
You do not get a check. Instead, your tax bill this year will be reduced by $10,000, or whatever your federal tax bill is, whichever one is less. An easy example is this: Whenever you file your taxes next year (in 2003) for this year's income (2002), let's say after all is said and done that your tax bill (or the amount that you should have paid for the year in income taxes to the federal government) is $5,000. This is after you have taken all of your other deductions, credits, etc. Let's say that your employer took a grand total of $6,000 out of your check during the year, so you are now owed $1,000 by the government. With the tax credit, the government will now also owe you the $5,000 that you would normally pay them. So,...instead of getting a refund of $1,000, you will now get a refund of $6,000. And, because you did not use the entire $10,000 credit (you only used $5,000), you would do the same thing the next year. You can take up to five years to use the credit, if your tax bill is less than $10,000 each year.

It's great that the government pays for $10,000 of your adoption expenses, but the problem is you don't get this money from them until you get your tax refund the following year, long after you've already paid for those $10,000 worth of expenses. If you truly don't understand my explanation, I would contact an accountant. Most CPA's won't touch adoption, but I'm sure if you ask around enough you'll find one that will know what's going on.

There are also other ways to get at that money sooner. For instance, you can reduce your federal tax withholdings to zero. This means that your employer will not withold any federal taxes throughout the year. Knowing that your tax bill should be under $10,000, and knowing that you will get an adoption credit of the full amount of your tax bill, you obviously can determine that you will not owe any taxes for the year. This means that since your employer is not witholding any money for federal taxes from your check, your paychecks will be bigger each time than they normally would be. In effect, what you've done is gotten your tax credit in installments throughout the year. This is great if you'll set aside this money to pay for your expenses, but many people don't have the willpower to do this. They also might get used to having a larger paycheck than they normally would, and will get a big shock when they have to go back to having their employer withold that money from the paychecks in a year or two.

I believe that there are also ways to sell or "assign" your credits. I know that that's allowable with the State of Missouri's tax credit, but I'm not sure about the Fed's credit.

Hope I've helped!

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Originally Posted By Mack

Thanks so much for the information! I didn't understand how the adoption credit worked, so I stood in line for 2 hours to speak with a tax consultant at the public library. He told me that I would only receive a credit if I owed money beyond what was deducted from my paychecks. He also said that I could not reduce my withholdings to zero, because . . . I don't know, something about my taxable wages having nothing to do with the adoption credit. In a nutshell, he said that only people with extraordinaryly high incomes could benefit from the adoption credit.

I'm glad I chose to research further, rather than take his word for it!

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Originally Posted By davis

I think you are mistaken about the reimbursement. I don't think the tax credit will work if you are owed money by the govt.

I may be wrong.

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Originally Posted By chieffan9

Davis,
No, no, no. Whether or not you are owed money by the government has absolutely nothing at all to do with whether or not you get a tax credit. Unless you have an incredibly unique situation, if you work for a living, you owe the government income tax every year. Your employer takes money out of your check each month to help you set aside money to help pay this tax bill to the government. Sometimes, your employer takes out too much, in which case the government sends you a refund check after you file your taxes. In other cases, your employer doesn't take out enough, and you have to send the government a check along with your tax papers. Either way, you will have paid the government a lot of money in income taxes for the year. Here's why EVERYBODY who adopts can take advantage of the tax credit: No matter how much money you make in a given year, part of this money is paid to the government in income taxes. The US government has decided that adoption is something that makes this country a better place. So....they have agreed to allow all people who adopt to use the money that they would normally pay the government in income taxes for an adoption instead. (Up to $10,000 per adoption only, and it can only take you up to five years to use the credit.) In essence, the government is giving you your income tax money back, as long as you can prove you spent at least that much money on adoption. Tax refunds have absolutely nothing to do with tax credits. All a tax refund means is that your employer took out too much money during the year and the government is sending you the extra back. That's it. A credit is a reduction of your tax bill!! It's an incredible deal and if you or your accountant is not sure about the credit, find someone who understands it to do your taxes instead!

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Originally Posted By chieffan9

Mack,
The guy you talked to doesn't have a clue. Call around and find an accountant that deals with adoptions. Like I said, they may be hard to find, but it'll be worth your time and energy.

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Originally Posted By chip

Your post seem to be based in professional as well as personal experience, and given the confusion surrounding the credit/exclusion issue, that's a good thing. Care to lend your voice to the "finalization" question, particularly for those of us on the cusp of 01 (expenses incurred) and 02 ("readoption" or "finalization" in the US in 02) and above the 01 AGI limit, but not the 02 one? One thing that seems clear is that all of us bringing international kids home where mom and dad both traveled had "final" adoption decrees upon their arrival in the US. Beyond that, the picture is very grey.

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Originally Posted By chieffan9

Oooo....much tougher questions. I had to research this a bit. Let me preface this by saying that I am not a tax accountant (or even a practicing accountant at all for that matter), but I do have an accounting degree and certainly understand the basics of how the tax system works. I had to take a look at the IRS and INS websites for some of these things and here is what it appears to me that they are saying regarding your questions. Also, I am assuming an international adoption for all items below!!

Finalization: The way I understand it is that the adoption becomes "final" the moment that the foreign judge says it is. As soon as he signs whatever document he needs to that says that the child is now yours, your adoption is final. That should happen while you are in the foreign country and before you head home with the child. That is why you spend so much time with the judge as he is the one that says the child is now yours. Now, as far as the moment that the child becomes a US citizen, that is somewhat up for debate from what I found, but as long as you have INS approval prior to your trip abroad, (which I understand most everybody does), then your child at the very least becomes a US citizen once you get him/her home. As of February of 2001, you no longer have to wait or apply or "readopt" or anything that may have had to have been done previously. Now, once you get INS approval, once the child is yours (once the adoption is final) and living under your roof, the child becomes a US citizen. I think perhaps some have gotten confused regarding adoption finalization versus US citizenship in the past. I think it's a lot easier now.

It also looks like with all foreign adoptions, if you had adoption expenses in 2001, but the adoption wasn't final until 2002, you can't take the credit on them until 2002 AND you are limited to only $5,000 worth of expenses (since that was the rule in 2001). However, you can ALSO take up to the remaining $10,000 credit that you haven't used yet towards 2002 expenses. In other words, you can take the credit in 2002 for expenses incurred in 2001 (up to a $5,000 limit) AS WELL AS any expenses incurred in 2002, up to a TOTAL limit of $10,000. Example A: 2001 expenses = $7,500, 2002 expenses = $4,500, take total credit of $9,500 ($5,000 for 2001 and $4,500 for 2002). Example B: 2001 expenses = $7,500, 2002 expenses = $7,500, take total credit of $10,000 ($5,000 for 2001 and $5,000 for 2002). Example C: 2001 expenses = $3,500, 2002 expenses = $7,500, take total credit of $10,000, ($3,500 for 2001, $6,500 for 2002). Make sense? Just remember it's a $10,000 credit PER ADOPTION, not per year. Most likely, with an international adoption, no matter when you incurred the expenses, you'll get your $10,000 back.

As for the AGI, it looks like as long as your adoption becomes final in 2002, you can use the new rules (higher AGI threshold) and it really doesn't matter when the expenses occurred.

Hope this helps. Any other questions, I'd be glad to take another look.