[Kiana]

Does the tax credit mean that, say, if you owe $7000 in income tax the year you adopt that you won't have to pay any income tax, and also take $3000 off your income tax the next year?

OR....

does it just mean that you can take $10000 off your taxable income?

I'm confused on this matter.... any Canadians out there that know?

[luvmykatydid]

A tax credit is different from a deduction. Basically, you are right on #1. If you owe $7000 in taxes, (and say you had $5500 deducted from your check), you would get the $5500 back this year, then next year you could use the rest ($4500) the same way. You will not get back more than you had deducted, though. It can roll over for about 5 years in the US. Don't know about Canada. My problem is that since I am self-emplyed, it will take longer to recoup, since we only have my DH's tax withdrawal. Hey, maybe I should reduce our exemptions so we get more back this year...

jennie
LID 3/15

[ddhuab]

Because generally we are talking about the US income tax system (I think) when most of us refer to the tax credit. However, even though lots of Canadians are on the boards, I have never heard hear nor there about this (it is interesting to me that it would be nearly the same amount as US tax credits, though).

Sorry, no help here, but bumping up your question for you.

D.

[Kiana]

So in other words, if you ARE self-employed this credit doesn't help that much...??? I'm still a little confused. But then I've always been hopelessly challenged where anything having to do with taxes is concerned!

[ddhuab]

it just matters how much of a tax liability you have... if you are self-employed and earn enough income to have to pay $5,000 in taxes each year, then that is two years you don't have to write that check. If you are self-employed and don't earn enough to pay taxes, then no, it won't help much. If you work for an employer and do not earn enough to pay taxes (and here, I mean you do your taxes and have a tax liability of $0 or significantly less than $2,000), then no, it will not help much.

The PP was correct, but brief... you may try searching on "tax credit" and you might find some good explanations, scenarios. Of course, self-employment may be very different in Canada, maybe?


D.

[terryb]

I have just asked my hubby (the guy who does our taxes in this house) and he explained it to me.

http://www.cra-arc.gc.ca/agency/budg...changes-e.html

The tax credit is actually 16% of adoption related expenses up to a maximum of $10, 000 (not a straight $10,000 credit unfortunately). So, if you have spent more than $10,000 on your adoption, you would have a $1600 credit which is then deducted from your federal tax. This in turn might reduce your provincial tax as that's based on your federal tax.

If you're self-employed, you'd still have to pay tax so yes it would benefit you.

Hope that helps!

[Kiana]

OK, I think I've got it now. Thanks a lot! And thanks for that link...very helpful!

[LAD5]

So what if you don't owe, and normally get a couple thousand back? How does this credit effect that? We always get back, and I thought the credit would give us more back???

[ddhuab]

If you live in KY, you will deal with the US Adoption Tax Credit. The law in the link above would not apply to you, as that is for Canadians. US residents get a tax credit for all "qualified" adoption expenses up to 10,000.

You probably actually do pay taxes, I am guessing. Your tax liability has little to do with whether you get a refund or not. You need to look at the line on the tax form for your "tax liability", something you look up in the tax tables in the booklet, according to your adjusted gross income. Many, many people choose to get more money withheld than they will actually owe in taxes, so they get refunds. If this is your case, you will probably get a BIGGER refund.

If you generally receive ALL your witheld taxes back in a refund each year, then, no, the credit will not help you. However, you can continually use the credit for five years, until you have taken the total amount, so if you pay any taxes at all, then you can get *some* relief from the tax credit.

D.

[Trace7]

Originally Posted by LAD5

So what if you don't owe, and normally get a couple thousand back? How does this credit effect that? We always get back, and I thought the credit would give us more back???

This is the same with us. I am curious about this too.

[DeannaMom]

the Tax Credit is a CREDIT not a deduction. The credit is taken from your TAX Liability...Not sure where the 16% thing above comes from but for domestic infant adoptions you keep the records of your costs and deduct the actual costs up to the $10,300 from the amount of Tax you would generally have a liability to pay... if you cannot deduct it all the same year you roll it for up to five years.

families who adopt a special needs child from the us Foster care system get the full credit no matter what the costs were for the adoption.

not sure how it works with international adoptions at all?

http://moneycentral.msn.com/content/...D=37251#Rating

[sak9645]

Here's how the tax credit works in the U.S., for international adoption only. (It works a little bit differently for domestic adoptions.)

For more detail, download from the IRS website the Adoption Tax Credit Form 8839, the Instructions to Adoption Tax Credit Form 8839, and Tax Topic 607. I'm not an accountant, so you may want to talk with your tax adviser and look at some tax software, as well.

The tax credit is per child. If you adopt two children at the same time or at different times, you can take two credits, as long as you meet the requirements below.

Basically, to be eligible for the tax credit, you must fulfill ALL of the requirements below:

a) You must have had a full and final adoption. If your child comes home on an IR-3 visa, meaning that both spouses in a married couple, or a single parent, saw the child prior to the overseas finalization, the IRS -- like the USCIS -- considers the adoption to be full and final in the year you bring your child into the U.S., so you can take the credit in that year. If your child comes home on an IR-4 visa, the IRS -- like the USCIS -- does not consider your adoption to be full and final until you have readopted your child in your home state or, where it is allowed, obtained state "recognition" of your child's foreign adoption, and you cannot claim the credit until the year in which the readoption or recognition occurred. You CANNOT claim the credit for expenses occurred in a failed adoption, like you can with a domestic adoption.

b) You must have incurred some qualifying adoption expenses. If you have incurred at least $10,390 in qualifying adoption expenses, and most internationally adoptive parents do incur at least that much, you can claim the full tax credit if you meet all the other qualifications. (The $10,390 figure adjusts each year due to inflation.) If you have incurred less than $10,390 in expenses, you can claim part of the tax credit, if you meet all the other qualifications. Note that you could have incurred these expenses before 2005; it doesn't matter.

c) You must have adjusted gross income (AGI) of less than $195,860. If you earn over that amount, you cannot claim the tax credit at all. If your AGI is less than approximately $150,000, you can take the full credit, if you qualify in all other ways. If you earn between that amount and $195,860, you can take partial credit.

Here's how the credit works:

First, get comfortable with the concept of "total tax liability". On your 1040 tax form, whether or not you are adopting, there will be a place where you figure how much tax you owe in total, based on your income and deductible expenses. It is calculated BEFORE you figure out how much you already paid of that tax via your payroll deductions or estimated tax filings, and whether or not you will have to pay anything or be able to get a refund on April 15.

The adoption tax credit simply reduces your total tax liability by $10,390. If you don't have $10,390 in total tax liability in the year you claim the tax credit, you can carry the unused credit forward for, I believe, five years.

Let me give you some examples. I will assume here that the person qualifies for the full tax credit, based on income and such, for one child. I will use the male pronoun, simply to avoid the cumbersome "he/she". The tax credit, of course, can be taken by a single person (male or female), or by a married couple filing jointly. Consult your tax advisor if you are married and filing separately. I will also use round figures, such as $10,000, rather than the actual numbers like $10,390.

a) A person's total tax liability, without considering the tax credit, is $10,000. He paid the full $10,000 of this through payroll deductions for taxes during the year. If he had not adopted, he would not have owed any money on April 15 and would not have gotten any refund. Since he adopted, his total tax liability is reduced to zero. Therefore, he overpaid his taxes by $10,000, through his payroll deductions, and this amount will be refunded to him.

b) A person's total tax liability, without the tax credit, was $10,000. He paid $8,000 of this amount through payroll deductions during the year. If he had not adopted, he would have owed $2,000 on April 15 (the difference between tax liability and amount paid). Since he adopted, his total tax liability is reduced to zero. Therefore, he overpaid by $8,000, which will be refunded to him.

c) A person's total tax liability is $10,000. He did not pay any tax through payroll deduction or estimated tax filings during the year. If he had not adopted, he would have owed $10,000 on April 15 (plus, probably, some penalties for underwithholding tax). Since he adopted, his total tax liability is reduced to zero. He does not owe any tax and he does not get any refund.

d) A person's total tax liability is $10,000. He paid $12,000 through payroll deductions. Normally, if he had not adopted, he would have received a refund of $2,000, since he overpaid his taxes by that amount. Since he adopted, his total tax liability is reduced to zero. Since he paid $12,000 through his paychecks, he will get, instead, a refund of the full $12,000.

e) A person has a total tax liability of $6,000. He paid the full amount through his payroll deductions. Normally, he would not owe anything on April 15, and would not get a refund. Since he adopted, he can use $6,000 of the tax credit to reduce his total tax liability this year to zero. That means he overpaid his taxes by $6,000 and will get that amount as a refund. In addition, he has $4,000 of unused credit to carry over to next year's taxes.

A person has a total tax liability of $6,000 and did not pay any taxes through payroll deduction during the year. Normally, he would owe $6,000 on April 15, and, probably, a penalty for underwithholding. Since he adopted, he can use $6,000 of his credit to reduce his tax liability to zero. Therefore, he would owe no tax this year. He also has $4,000 of credit to use next year.

The bottom line is that the tax credit is a big help to many taxpayers. It can either increase their refunds or reduce the amount of tax they must pay.

I hope this is helpful.


Sharon