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Originally Posted By Kathy Reinertsen

How does the tax credit work if you receive a refund each year from the IRS? Should we change our deductions and have them take less out so that we owe at the end of the year? I am totally confused.
Thanks,
Kathy

[Archive]

Originally Posted By chieffan9

Kathy,
What you SHOULD do is really up to you. The "ultimate" way to go about your taxes is to try to work it out to where you have a zero refund, but don't have to pay anything on April 15, either. This would mean that you paid the EXACT right amount of taxes throughout the year, you don't owe the government anything, but you also didn't give the government an interest-free loan for a whole year, and you got back the maximum money from each paycheck. However, this is virtually impossible to do.

Many people set up their taxes as a sort of built-in savings tool. They have their employer take out too much money during the year so that they make sure to get a nice refund. This is fine, as long as you understand that if your refund would have been smaller, your paycheck each week or month would have been bigger and you could have taken that extra money and invested it and made some money off of it. As it is, the government gets to use your money for free until they give it back to you via a refund check.

In this particular situation, if you leave everything alone and continue to have your employer take out the same as they always have, then not only will you get your normal refund back, but you will ALSO get an amount equal to your total Federal Income Tax bill back as well. In other words, your refund check will be HUGE. Part of it will be your normal refund, the other part will be a sort of repayment of your adoption expenses.

However, you CAN have your employer take out less, like you said. However, you still won't OWE anything at the end of the year, as long as your adoption takes place in that year. That's kind of the beauty of this particular tax credit. For most people, every dime that they would normally have paid to the government in Federal Income Taxes, is instead used for the adoption. Let me give you a quick example.

Example A (normal year): Let's say that your income is $50,000 and after all deductions, etc., you file your return and you should have paid $5,000 in Federal Income Taxes during the year. However, your employer took out $7,000 from your paychecks during the year and sent it to the government. They paid too much. This means that the government will send you a refund check for $2,000. There is your normal refund.

Example B (adoption year): Same situation, except this year you adopted a child and had expenses of at least $5,000. This time, instead of receiving a check for $2,000, you will receive a check for $7,000. It's the $2,000 that you would normally get, PLUS the government is giving you back the $5,000 that you would normally have paid them so you can use that money instead on adoption expenses.

If you have good willpower and are able to set aside the extra money from your paycheck every month and use it on adoption expenses, etc., then by all means have your employer hold out the least amount possible from your paychecks every month. However, if you are like me, and have a hard time making sure that money goes where it's supposed to, then I would leave everything alone, get your BIG check in April of next year, use part of it just like you would your normal refund check, and put the rest (the $5,000 extra in my example) to pay off that loan you took out to finance the adoption, or build your savings back up, etc. Use it against those adoption expenses you incurred.

[Archive]

Originally Posted By Kathy

Thank you so much for that explanation. I now understand this whole tax credit thing.
Thanks again
Kathy

[Archive]

Originally Posted By Shelly

Now I'm confused. In above posts, I gathered that the "extra" money was put toward future years' taxes, but this thread seems to indicate that we can get a check back. Please, somebody respond... If we can get a big check come April 15th, I'm jumping on the bandwagon RIGHT NOW and adopting... (We are in the same boat with this poster - We always get a refund back.)

[Archive]

Originally Posted By chieffan9

Shelly,
Let's take the same situation that I described earlier (it appears as though you fall in the same category).

Let's say that in any normal year, you add up your total income, take away all of your tax deductions (like mortgage interest, charitable donations, etc.), tax credits (like child credits, etc.), and other non-taxable income and you end up with a number. This is called your taxable income. Once you have this number, you can figure out how much money you SHOULD have paid the federal government in the past year. In my example, we used $5,000. In my example, your employer actually took out of your paychecks $7,000. This is why you get a return every year. Your employer is taking too much money out of your paycheck each month. This "extra" money is yours. This is not some sort of rebate or money that the government is giving back to you out of the goodness of their hearts. This money belongs to you, and they MUST give this back to you. This is why you get a $2,000 refund check in the mail every year (or whatever amount it is).

Now, here's the deal for adoptions and where I think you're getting confused. The TOTAL credit per adoption for federal tax purposes is $10,000. Let's say you have the same situation as before, except this year, you will spend $15,000 on adoption expenses. The government is saying that they will pay for $10,000 of those expenses through tax credits that can be taken up to five years after the adoption. Here's what that means:

1) you spend $15,000 this year on adoption expenses
2) on April 15, you send in your income taxes listing the same income, deductions, etc., as normal
3) you figure out that you SHOULD have paid the government $5,000 in taxes, but your employer actually paid them $7,000. This means that you will get your normal $2,000 refund
4) THIS IS WHERE IT DIFFERS: the government now says "Hey, Shelly, instead of paying us that $5,000 that you normally would have; please use it instead to pay off some of that $15,000 that you spent on your adoption expenses from last year because we think it makes the world a better place when people adopt children who normally wouldn't have a nice home." This is why instead of your normal $2,000 refund check, instead, you will get a $7,000 refund check. This consists of the $2,000 that your company overpaid the government in the first place, PLUS the $5,000 that the government is being kind enough to give back to you. In essence, you will not pay the government ANY taxes in that year!
5) Now here's where I think you might have gotten confused; the TOTAL CREDIT per adoption is $10,000. In this example, you have only received a credit of $5,000. This means that you now have a "carryover" or "extra" $5,000 that you will now attempt to collect over the next four years. If your tax return looks exactly the same, then in year 2, you would get another check for $7,000 for the same reasons as before. This would bring your total credit to $10,000 and you would be finished with the tax credit.

For people who only pay the government $2,500 per year, it would take them 4 years to recover their credit. Some people might be able to recover it in one year.

This is an INCREDIBLE deal! The federal government is virtually saying that they will pay 100% of your first $10,000 worth of adoption expenses. The only catch is that you have to come up with this money first, and then they will pay you back at tax time the following Spring.

[Archive]

Originally Posted By Shelly

THANK YOU, THANK YOU!!! This makes a lot more sense now. I really appreciate you taking the time to explain this so clearly. This helps a LOT!

[pkthomas]

chieffan9,
Though this subject must be getting old for you, I am still confused. I have read some places that a person would get the full $10,000 back on their taxes plus whatever they were entitled to in the first place.
Other places, including the web site http://www.bankrate.com/brm/itax/Edi...s/basic_1a.asp
state that you cannot get money back, only credit. If this is true, it would only make sense that beginning the year expected for the adoption to be finalized, one would lower their weekly deductions so they owe money at the end of the year. They would not get any money back, but they in essence would not be paying any taxes all year, and until the full $10,000 is used- or five years, whichever comes first.
Please let me know, becasue we are anticipating our adoption to be finalized next year sometime. As of now we are planning on changing our deductions as of January 1, 2003 so we get way less taken out of our checks each week so we can owe a ton of money the following April 15, 2004.
Thank you,
Paul

[BeckyS]

my understanding is the same as pk's. I have been to tons of sites & also talked to people that have adopted under the old credit law & have been told that in no way is this any kind of refund. It is a credit only & benefits you only if you owe at the end of the tax year.

[organicmommy]

Ok, I just got off the phone with the IRS. What they said is this...If you pay in 5000 dollars through the year and at the end of the year would normally get a refund of 2000 dollars, then you are still paying in 3000 dollars in taxes to the IRS. The tax credit can take that 3000 you were supposed to pay down to 0. Then you can take the credit up to 5 years to use up as much of the 10,000 as you qualified for. In my case that is 10,000 total because we are doing a special needs adoption.
Hope this helps, if you want, call the IRS, the number is 1-800-829-1040.

[BeckyS]

this all sounds kinda like a riddle - HA! So, does that mean that the $3000 you paid comes back to you in the form of a refund??? That is totally not what I have been told previously. Thanks for the #, think I'll give em a call

[organicmommy]

If you qualify for the entire 10,000 dollars of credit, you will be allowed to use the credit to take the amount that you would have normally been required to pay in income tax for that year down to zero. If you still have credit available after the first year, you can take it each additional year until it is used up. The only thing you can not do is make it so that the IRS owes you for taxes that you did not or would not have normally had to have paid. But they will make it so for the year that you do the adoption you do not have to pay in any income tax for the year if you qualify. If you normally get back every penny that you paid in for the year, then you can not use it. That is the only thing that I can tell you.
I am sorry it seems so confusing, it was not confusing to me until I started reading on here and wondering if i had been reading it wrong. But after talking to the IRS, what had been stated at the beginning which is what I thought is true. Refer to the above reply written by chieffan9.
Good luck

[BeckyS]

that's been my understanding as well - except, no refund - I have been told by a tax advisor to alter our witholdings to owe as much as possible until the $10,000 is gone....I think I should stop reading about it also

[reneetaylor]

On that bank rate site mentioned earlier, it clearly states that the adoption credit is a "non-refundable credit". That says it all, and I hope that Chieffan9 looks into it more, or else she is in for a big surprise.

[nitty]

Now I am really confused about this. I finalized in Sept 2002. I went from a 2 family income to one in January 2002. I didn't change anything with my hubbies job. I would think that we are probably going to be owed a refund since we are making less money. If I don't owe, then how does this tax credit benifit me. I spent over 10,000 in adoption fees so does this carry over to next year????? And what do I do????

Thanks, Nitty

[organicmommy]

From when I talked to the IRS yesterday what they told me is that even though we generally get a refund of about 3000 dollars we will still be eligible for the tax credit since we still have money that we pay in through the year that we do not get back. As far as more than 10000 the tax credit max's out at 10000. So the rest of it you will not get back.
I hope this help, you can also call the 800 number I put in my last post and explain your situation and see what they say. Be sure to let us know