[SuburbanMom]

One more attempt to clarify things (to the best of my knowledge):

The tax credit works against your Tax BILL. When you fill out your taxes, your BILL (ie the amount you OWE) gets reduced by the amount of the credit. If you are getting a refund, you don't have a bill, so you can't use the credit. The idea is that you use your money for the adoption, and not hand it over to the government.

The tax credit is a non-refundable credit. You don't get any additional refund.

So, what should I do if I usually get a refund? Change your withholding status with your employer. (Is it the I-9 form? I can't remember). Have as little tax taken out as possible. Talk to a tax professional, as there are penalties for people that don't have enough tax withheld and I'm not sure if they apply in situations where a credit is applied. (In other words, don't have them withold nothing unless a tax lawyer says that's ok!)

Hope this helps!

[organicmommy]

Ok I just got off the phone with the IRS again and this is exactly what they told me. If you look at your 1040 and look at line 40. This is your tax liability. So I will use mine from last year as an example for everyone. Our number on line 40 is 6026 dollars. now on line now if you look at lines 43 thru 50, ours on those lines did not have anything entered last year, had we finished up and adoption, on line 49 we would have entered in 6026 to make the number on line 52 zero. This would make it so that the amount of tax we paid in through the year would be ALL refundable. So on ours, we paid in 10127 in tax last year and so instead of getting a refund of 4101 last year we would have gotten 10127. If you have questions about this call them yourself, you can ask again, but that is what I was just told with my taxes in front of me.
Hope this clears this one up.

[organicmommy]

Oh one more thing, it is a nonrefundable credit meaning that you will not get more than you paid in through the year back at the end of the year. If you look at my above example, we would still have almost 4000 dollars left of the credit, we will not get to use that part of the credit that year, it will have to be carried forward to the next year.

[chieffan9]

Hi folks,
I've been away for awhile after they changed the forum page, etc. Organicmommy has it right. I think some here don't quite understand the differences between refunds, credits, tax bills, etc. Let me quickly explain how your taxes work, which may clear some things up for SuburbanMom, nitty, renee, becky, etc.

With your first paycheck of each year, you begin paying taxes to the government because your employer takes money out of your check and sends it to them. The inherent problem with this is that nobody (not your employer, you, or the government) knows exactly how much you should pay. This is an "estimated" tax payment, meaning that they could either be taking out too much, or not enough. No one knows and no one can really figure it out until the year is complete. The whole purpose for filling out and completing your income tax return every year is to figure out how much money you SHOULD HAVE PAID the previous year. The amount you DID pay was an estimate. You most likely either paid too much or not enough. This is what you're trying to figure out. If you paid too much, you get a refund for the amount that you overpaid. If you didn't pay enough, you must send a check in with your return to make up the difference. It's really as simple as that.

The amount you should have paid is the equivalent to what OrganicMom called your "tax bill". THIS IS THE NUMBER THAT MATTERS!!! Whether you didn't pay enough taxes during the year and still owe the government, or whether you paid too much and are getting a refund has ABSOLUTELY NOTHING to do with the adoption tax credit!! In my previous example, the "tax bill" or what you should have paid to the government was $5,000. However, the employer took out $7,000 from your paychecks and sent it in to the government. This means that you get a refund of $2,000. If your tax bill is $5,000 but your employer only took $4,000 out of your paychecks, then you still owe the government $1,000 and must send them a check for this amount when you send in your tax return.

Now, the tax credit, in EITHER CASE above, will be $5,000 because that is equal to what your tax bill was. No matter which example you fall under, you will receive a $5,000 credit toward your tax bill. Here's how. In the first example, the employer took out $2,000 too much during the year. In this case, you will receive a check from the government for $7,000. ($2,000 of it is the refund of extra money that your employer took out of your paychecks throughout the year, and the other $5,000 is the tax credit.) In the second example, you will receive a check from the government for $4,000. (This is the $5,000 credit, minus the $1,000 that you still owe the government because your employer didn't take out enough money during the year.) (In actuality, the IRS may require that you send them a check for $1,000, then they'll send you a check for $5,000. I'm not sure which way they do it, but the effect is the same.) Also, if your tax bill is $3,000 instead of $5,000, then your tax credit for this year will be $3,000. If your tax bill is $9,000, then your tax credit will be $9,000. The tax credit is equal to your tax bill, up to $10,000, as long as you have qualifying adoption expenses for at least that amount.

The thing that some people may be trying to explain to some of you is to have your employer take out NO taxes during the year, making your paychecks bigger. This is certainly an option, but it does not in any way affect whether you get a tax credit or not. The fact that you will GET the credit is the reason they are suggesting you do this. You will get the credit NO MATTER WHAT you do regarding your employer withholdings. If you keep things the way they are now, you get the credit. If you change things, you get the credit. If your employer always takes out too much money during the year and you always get a refund check, you'll get the credit. If your employer doesn't take out enough, and you need to send the IRS more money, you still get the credit. It doesn't matter. What it DOES affect is how big your paychecks are during the year, and how much that check is that the government sends to you (or you send to them) at the end of the year. Either way, the government is still giving you the money. It's just that it may be in a different form.

Suburban Mom,
As I explained above, just because you are getting a refund, does not mean you don't have a tax bill. If you pay taxes to the IRS, then you have a tax bill. The refund is just the extra amount that you paid during the year. Imagine this: Let's say that your electric company only reads the electric meter on your house at the end of every year. So, they decide to just charge you a flat fee (let's say $50 a month) throughout the year, until they read the meter at the end of the year and make everything square with you at that time. So, throughout the year you pay your $50 per month, for a total of $600 for the year. Now, at the end of the year, the electric company reads the meter and figures out that you only used $500 worth of electricity this year. This means that you paid $100 too much, and the electric company will now send you a "refund check" for $100. You are now good to go until next year. Your electric bill (see "tax bill") was $500 for the year. Your refund for the year was $100 (see refund check).

To further equate this to a tax credit situation, let's say that the electric company offers a $1,000 credit toward their electric bill for anybody that allows them to run power lines through their property. Let's say you allow them to run power lines through your back yard, because you're interested in getting $1,000 worth of free electricity. Now, your electric bill doesn't change, it's still $500. You also still paid $600 during the year. So, the electric company still owes you the $100 that you overpaid. However, NOW ALSO, they are going to give you ANOTHER $500 back because you are taking advantage of the $1,000 credit. They are giving you $1,000 of free electricity. Since you only used $500 worth of electricity this year, you still have another $500 credit coming to you. So......your electric company will now send you a check for $600 instead of $100 because of the "power line credit", and you will then "carryover" the other $500 worth of credit that you didn't use this year.

All:
Frankly, I would suggest not changing your withholdings, especially if you don't really understand what's going on. The attempt with changing it is to increase your paychecks each month and use that extra money that you are getting toward your adoption expenses. This is fine, but can be quite confusing, and worst of all, if your adoption is for any reason not finalized in the year that you think it will be, then it throws everything out of whack and you will have to pay penalties to the IRS for not paying enough taxes throughout the year. I would suggest just leaving everything the way it is, getting your taxes done as quickly as you can the next year, and taking your tax credit check (that you'll get back after you send your taxes in) and using it to pay off your loan you took out for the adoption, or put it back into your savings account (if you withdrew from savings to pay for the adoption), or whatever. This creates a "debt hole" on the front end, but you can pay it off in nice big chunks early the next year. If you do it the other way, your paychecks will be bigger, but there's also the temptation to spend these bigger paychecks on big-screen TV's and a car payment rather than putting it away for your adoption expenses. Just my opinion.

[Ilke]

If anyone is still interested please go to the IRS website, which is www.irs.gov On the left hand side there's a place for forms and publication finder. Type pub 968 (give a space between pub and 968). Then you can download and print the form, which explain well about this subject.

English is not my first language and sometimes it is a little hard to understand a few things, but my husband will check on it since he won't have a problem at all with the technical terms.

Good luck!

[jenna202]

One thing you need to bear in mind is that until 2003, you will only receive credit for money you ACTUALLY SPENT in pursuing the adoption. So if you spent $2,000 adopting, you only get a maximum $2,000 credit - NOT $10,000. Beginning in 2003, if you adopt a "special needs" child - that would be virtually any state/foster care adoption of a child who is NOT a white child under 2 years old, you get a credit of $10,160 REGARDLESS of how much money you spent on the adoption. So if you spend $0 to adopt in 2003, you will still get a credit of $10,160, IF you owe taxes of that amount or greater.

Hope I didn't just make the confusion worse, but for those of us doing special needs adoptions, this is awesome. In terms of attorney fees, homestudy expenses, etc., I will spend $0 adopting my daughter in 2003. So getting this big old refund will be a nice chunk of change in her college fund.

[karenow]

This thread has been incredibly helpful to me. I was told by two separate tax professionals that I could not add the credit onto a refund. Apparently they did not understand the difference between tax overpayment and tax liability.

In any case, we are going to change our W-4 (we currently have no exemptions) in order to stop getting such a huge refund, and are going to be tucking away every spare penny this year into the adoption fund. Since we bought our house three years ago we have been getting about $9000 back each year. While this is nice, I'd rather get it sooner than later.

Does anyone know how an exemption relates to how much less they take out? Is it a certain percentage point?

Karen
homestudying

[led]

In case you haven't heard about it, there is a website that has a really well done course on the tax credit. Go to http://www.adoptionlearningpartners.org. They have free e-learning courses on adoption topics. THe tax credit course gives examples of how to apply it and it is very easy to understand. There is also a course on transracial adoption called Conspicuous Families. A lot of the listservs have been talking about it.