[Papa D]

I'm familiar with the $10,000 adoption tax credit, and I know that you can carry forward for five years. But my tax accountant just advised me to change my withholding to 13 or so exemptions/allowances for the last quarter of the year so I get to the point where I owe enough taxes to even cash in on the tax credit. Does this make sense? Is the goal, essentially, to end up owing about $2,000 each year for five years and have the tax credit wipe it out?

Also, does this apply in any way to state tax withholding?

BTW, Papa D and family are enjoying our two week old daughter after ICPC cleared. We're getting more gifts than we got for our wedding!

[kelceesmom]

Congratulations! We've all been waiting. Go on the IRS website and see what all the rules are. I know it has a lot to do with how much you make also as to whether or not you allowed to claim the credit or how much of it. Can't wait to see a picture.

[DianeS]

That isn't going to make any difference at all. You may get to keep more money from each paycheck, but the adoption tax credit doesn't have anything to do with whether you pay the IRS in paycheck withholdings or whether you plan to pay by check on April 15th.

Instead, the adoption tax credit has to do with your tax liability. Remember when you're doing your taxes and you have to take your taxable income and go to that big table in the back of the book? You look up the range your taxable income falls in, and follow the line sideways across the page. Then you take the type of taxpayer you are (single, married, head of household, etc), and follow it down the page. Where the two lines intersect is your Tax Liability.

That line doesn't have anything to do with how many exemptions you claim during the year.

If your tax liability is greater than 0, chances are you can take advantage of the adoption tax credit - at least to some extent.
But if the tax liability is 0, then you cannot take advantage of the adoption tax credit. And nothing except earning more money or having fewer deductions will make your tax liability any higher.

One thing your tax accountant may be thinking is that you have to OWE the money in order to take advantage of the adoption tax credit. But in reality, it's fine if the IRS has gotten your money through paycheck deductions. If they have your tax money already, they'll send it back.

Another thing your tax accountant may be thinking is that it is better to have your money in your bank account all the time instead of waiting for the IRS to send it back to you. That is a possibility. You would rather that money be sitting in yoru bank account earning interest for you, than sitting in the government's bank account earning interest for them. I would personally rather owe the government and pay on April 15th than have paid them early in the year and get it sent back to me. But that has to do with interest income and does not have anything to do with the adoption tax credit.

Hope that helps.

[2Bulgarianbeauties]

I am doing exactly what your tax adivor is suggesting. I have claimed enough to basically take my federal withholdings down to $0. That way, I get the money each check instead of getting a large refund in April. I am not doing this with the state, as they give a $1,000 refund.

Kay

[Nevada Jen]

What your accountant is suggesting is kind of dangerous. Your adoption needs to be finalized by the end of the year before you are entitled to the tax credit. So if for some reason the adoption can't be finalized for a while (and there are a million non-scary reasons) you could end up owing money at the end of year. We mananged to get in just under the wire for our baby born around the same time as yours. But it took forever to get the final order and then after 8 weeks of waiting for the birth certificate which we needed to get him a social security number we found there was a typo in the order so the order had to be redone. Then before we could file our taxes we had to wait another couple of months for his birth certificate. We ended up filing our taxes in July. If we had owed money to the government we would have owed tons of money in interest. If we had not finalized until January 2 we would not be entitled to the credit until 2007 for a kid born in 2005.

If you can swing it, the safer course of action is to keep your withholdings the same until finalization.

Jen

[sugarbabysmommy]

Jen makes a great point, especially since this is August and your child is only two weeks old and it often takes at least six months to finalize (depending on the state and even the county). Read the publications and you'll note the table that explains when you can take the credit in relationship to finalizing.

The dederal credit has no connection to reducing your tax liability with the state, some states do have their own adoption tax credits, so you should do some research. I found our accountant to be great for everything but this, we were the first family he'd ever had come to him with the adoption tax credit.