[lookingeast]

Does anyone out there know how the tax credit actually works? I understand it reduces your tax liability, but is there a catch? Does the amount lessen depending on your income? It seems to good to be true.

[skingspan]

Here is a link to the adoption credit section of the IRS website. The credit does phase out if your income is over a certain amount.

Tax Topics - Topic 607 Adoption Credit

[lovemybulldog]

Originally Posted by skingspan

The credit does phase out if your income is over a certain amount.

It does phase out, but the starting point of the phase out has changed. Here's another article that discusses some of the "strings" attached to the credit.

$10,000 adoption credit has many strings - MSN Money

[Happy2Bhere]

I don't know how it works, but we somehow didn't get a penny! I don't know if it is income bracket, or if work reimburses you, or what- but we didn't notice a cent!
We did get reimbursed from our employer for $10,000- so maybe that is where the tax credit went- to them, for the adoption assistance. This time around, we will get reimbursed $20,000- which is so nice- but I think that eats up the tax credit- somehow.
So, basically, I know nothing to help you out :-)

[KarenInCa]

Unless your adjusted gross income is over 155,000 you should qualify for the tax credit. The total costs for adopting from China is an average of around $18-22,000, so even for those fortunate enough to have a nice adoption reimbursement from your employer, you should still get some credit back from the IRS.
The tax credit is $10,300, and it's subtracted from your tax liability by the IRS, for the year of the adoption being finalized. In other words, if your normal tax liabilty is $12,000, and you've paid $9,000 into the federal taxes with your paychecks by the end of the tax year, then you would get back $7,000. ($12,000 owed, minus $10,000 would mean $2,000 total tax liability, so you would get back all but $2,000).
If your tax liability is normally less than $10,000, then the tax credit would balance the liability out to zero, and the remainder could be carried over till the next year, up to a total of five years.
It's a fairly generous tax cut, considering that the feds really don't have to do it.

[Mailbox13]

Karen pretty much hit it on the head. The other thing to remember is whether or not you employer reimburses you. If you had $15,000 of allowable adoptions expense and your employer reimbursed you for $10,000, then you would only be eligible for $5,000 of the credit.

Also, you can only take the adoption credit in the year that the adoption is finalized if you are adopting from China. My wife and I started our adoption in March of 2005 and brought our daughter home in December of 2006. So, we can take the adoption credit when we file our 2006 taxes. If we had been a month later, we would have had to wait until we filed our 2007 taxes (march of 2008) to claim the credit. People who adopt domestically can take it in the year they start the adoption.

According to my tax guide, the adoption credit for 2006 is $10,960 and for 2007 is $11,390. Phase out for 2006 starts at $164,410 and totally disappears at $204,410. If you do not use the full credit this year (your liability was less than $10,960), you can carry it foward for up to 5 years.

"Taxpayers who adopt a child with special needs are allowed to claim the full amount of the credit regardless of actual expenses paid or incurred in the year the adoption becomes final."

Also, married couples must file a joint return in order to claim the credt. The link to the instructions for form 8839 might be helpful.
http://www.irs.gov/pub/irs-pdf/i8839.pdf

[sakelley]

Originally Posted by Mailbox13

.

"Taxpayers who adopt a child with special needs are allowed to claim the full amount of the credit regardless of actual expenses paid or incurred in the year the adoption becomes final."

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.

[lovemybulldog]

Originally Posted by Happy2Bhere

I don't know how it works, but we somehow didn't get a penny! I don't know if it is income bracket, or if work reimburses you, or what- but we didn't notice a cent!

You might want to have an accountant look over that year's return to see if you are owed anything back or if there was a balance that should have carried over to the following year, but didn't. If someone did your taxes, but didn't explain why you didn't see impact from the credit, they offered a poor service, IMHO.

[Mailbox13]

Sakelley,

Your are right on the special needs children. That was farther down on the page I was reading. I guess I need to be a little more complete in my reading next time.

[sakelley]

Originally Posted by Mailbox13

Sakelley,

Your are right on the special needs children. That was farther down on the page I was reading. I guess I need to be a little more complete in my reading next time.

I was bummed about it because my daughter is considered special needs. Even our state has extra tax credits for special need children, but because she was born in China, she doesn't qualify.

[cungar]

I just did my taxes and we're going to get a huge percentage of our adoption expenses back. More than half in fact. One of the few times Uncle Sam has actually made me a happy man.

[oleson1]

Hooray for adoption tax credit!!!

I'm with cungar, this should be a GOOD tax season for once!

[sakelley]

I agree also - Hooray for the adoption tax credit

We changed our withholdings back in May so that we had barely anything taken out of our paychecks knowing that we would have $0 tax liability this year (why let the federal government hold our money interest free until tax season). Even with doing that, we are getting a big tax refund this year, plus we get a carryover credit of about $4000 for next year.

[sunshyne68ny]

We normally get a large refund, so if I understand this correctly we wouldn't get any of the credit until we actually OWE taxes at tax time right (and then it's applied towards what we owe)?

If that's the case and we are due to get about $7000 back in a refund, we'd have to change our deductions in beginning of the year so that we would owe money at the end of the year correct?

I'm so ashamed to have an accounting degree right now! Then again, I guess it's why I changed careers!

[lovemybulldog]

If I understand it correctly, it's a credit against your owed tax, meaning your number in all those columns in the instruction booklet...It isn't a credit against the balance of what you owe at the end of the return or so many people would never get benefit from it. You just can't use the entire amount if your tax liability is less than the amount of the credit. What I don't know is if this math starts after subtracting your withheld federal tax.

For example, if, based on your income, your owed tax in the book is $20,000 and you have $18,000 withheld from pay, you're liability is $2,000. Normally, you rely on deductions to make up the other $2k (and hopefully more so you get a return), so this means you have a surplus of $8k, which is what makes the adoption credit such a great benefit. I'm horrible with numbers, so maybe Cunar or a resident accountant can expand on this or correct me. I'm not sure if that extra $8k in the analogy is extra money on the return or if it carries over to the next tax year. Either way, I think it is one of the few times we win as taxpayers.