[sakelley]

lovemybulldog is right. It is a credit against your tax liability. So, for example, our tax liability for this year is $7000 and we paid $9000 by paycheck deductions, we would normally get a $2000 refund. But since we get the adoption credit, our tax liability is reduced to $0 by the adoption credit and we would actually get a $9000 refund. Because we only used $7000 of the adoption credit this year, we would have a carryover credit of $3960 (for tax year 2006 the adoption credit is $10960).

[Mailbox13]

I think a lot of people are getting confused between the amount of cash they would normally pay or get back when they file their return and what is their tax liability. Let see if I can offer an example that is any easier to understand just by changing the formatting a little. My example assumes income is $80,000, two adults and two kids, taxes withheld from paycheck of $9,000.

Page 1 of the 1040 (see link below)
Income from W-2, 1099's, and other sources $80,000
Less alimony, IRA contributions, etc -$ 2,000
Adjusted Gross Income (page 1 line 37) $ 78,000
Page 2 of 1040
Line 38, top of the page AGI $ 78,000
Line 40, Deductions (charity, mortgage) - $ 12,000
Line 42, Exemptions, $3300 per person - $ 13,200
Line 43, Taxable Income $ 52,800
Line 44, Tax (tax liability) $ 7,169

This is the tax liability to which a lot of people are referring. At this point, we have not taken into account what was withheld from your paycheck or any estimated tax payments you made during the year. Now we apply the credits.

Line 53 Child Tax Credit for two kids $ 2,000
Line 54 Adoption Credit $ 5,169
Line 63 Tax liability after credits $0
Taxes withheld from paycheck $ 9,000
Refund $ 9,000
Adoption Credit carried to next year $ 5,731
($10,900 less $5,169 used)

I have obviously simplified this example. If you had no adoption credit, your tax liability (line 63) would have been $5,169 in this example. You would have still gotten a refund of $3,831 (9,000 less 5,169). The adoption credit increased your refund by $5,169 this year. It will also help next year. The line numbers are taken from this year's 1040 at the link below.

I hope this helps rather than muddying the waters. It seems like every time Congress tries to help us, they manage to make things more confusing.


http://www.irs.gov/pub/irs-pdf/f1040.pdf

[Mailbox13]

Please forgive the formatting in my previous post. All the numbers lined up when I typed it.

[lovemybulldog]

Mailbox, thanks for putting a logical spin on my example. Technical terms to me are "whatchamacallit" and "thingamajiger", so for the analytical folks in the bunch, you're a lifesaver... Your example really spells out how beneficial this credit can be for families!

[Sheba]

When we filed for our daughter in 2006 the tax credit was around $10,300 it looks like it went up for 2007 and we hope to have our next daughter in 2007 or early 2008. Atleast the wait will bring a little more credit our way!

[KarenInCa]

I just did our taxes with TaxCut and we'll be receiving a refund of $11,400 with a tax credit roll over of $1,500. Usually our federal tax liability is around $12,000 and we owe by the end of the year, but with the adoption tax credit, and the extra federal credit for dependants of $1,000, this is the first year we'll actually receive a refund, and it's a pretty penny too. It was very easy to do on our own, without an accountant.

For anyone needing to know, I also found out that in the state of California, there's a $2,600 adoption tax credit (make sure you find out if there's an additional tax credit for your state beyond the federal tax credit).

[KarenInCa]

Originally Posted by sakelley

According to the instructions for Form 8839 (Qualified Adoption Expenses), the child has to be a citizen or resident of the US or its possessions at the time the adoption process began to be considered a child of special needs. So this would not apply to an internationally adopted child.

This is correct information. SN children adopted internationally are not included in the all-of-it clause. However, most adoptions from China will be considered all-of-it anyway, because the expenses include EVERYTHING pertaining to the adoption, from US postage stamps purchased for mailing info, to airline tickets, to food consumed in China. And then, the obvious adoption expenses, such as the agency fees and the fees while in China. Our total expenses were $20,400 when we include everything, so even though we got employer adoption reimbursements of $7,000, we can still claim the full amount of the tax credit. Adopting internationally SN children or NSN children, it really doesn't matter, the adoption would allow for the full tax credit for most people that qualify.

[cungar]

Karen,

Thanks so much for posting this. I was doing my California taxes and I didn't know California has a tax credit for adoption. I redid it after I read your post and my state refund jumped by $1850! Plus I have some carryover for next year. Between the federal and the state credits, we'll get $13,000 of our adoption expenses back.

[specialk4b]

Thank you for pointing this out. It makes me feel better that we'll be able to afford this in the long run.

[AdoptAmiga]

Mailbox13: thank you for your explanation. I'm one of those rare birds who love to do their own taxes - and I'm not a CPA or anything related! I've always wondered if I was really doing the tax credit thing right, ever since 2002 for #1 and 2003 for #2 - and I am!!! Thanks to the carryover, I'll still have credit for 2006 and 2007, then my five year limit ends. And for anyone in Michigan, there is a $1200 one time credit to be taken the year the adoption is finalized.