[Momtosons]

Could someone help me figure this out?! We are trying to figure out if the credit will pay off our adoption loan with this tax season(Jan '10). We are trying to buy a house and I am so confused and I don't know what to tell our lender!

In 2008 we spent around $23,000 for the adoption. In 2009 we've spent around $3000. Will we get the full tax credit back with our taxes this year?! We have a $12,000 loan that needs to be paid off for us to buy a house....and I just can't figure out if we will be able to get it paid off with the credit!

Thanks for the help!!

[aclee]

You should be able to claim the full credit this year, since it was 2008 when you paid the money...even if you haven't finalized. If you paid in at least 12K, then you should get 12K back.

Good Luck!

[Momtosons]

Originally Posted by aclee

You should be able to claim the full credit this year, since it was 2008 when you paid the money...even if you haven't finalized. If you paid in at least 12K, then you should get 12K back.

Good Luck!

Thanks!!!

I see you are on DS! Congrats on your new little one!!!

[KarenInCa]

Perhaps what I'm about to say only applies to IA, I'm not sure. But, it's my understanding that it doesn't matter when you spend the money...2008, 2009, 2010.....It's when you finalize the adoption. Is domestic adoption different? Or did I simply misunderstand the tax credit? We thought we had to wait till it was finalized with our first daughter

[Fran27]

Unless you make a lot of money you will not get the whole $12k back this year. Let's say you pay $5000 a year in taxes, you'll get a $5000 refund... and next year another $5000, and the year after another $2000. It's a credit, which means they won't pay you back more than what you paid... and you can roll over the leftover amount for 5 years. Pretty much it means that if you don't pay many taxes, you actually can't benefit from the tax credit to its full extend.

And you can only claim the credit after finalization as far as I know, so if you finalize this year you can claim it next year.

[mnmomma]

I'm guessing you've already finalized based on the dates from your signature, but for a domestic adoption it doesn't matter. You should be able to take the full credit based on all the amounts you paid in 2008 for your 2009 tax return. That assumes that you have a tax liability on your return of at least $12k - the credit only reduces the tax owed. So if you've paid in $12k of payroll taxes over the year and the credit reduces your tax owed by that amount, it would be refunded to you (very simplistic example).

Here is some good info straight from the IRS:
Tax Topics - Topic 607 Adoption Credit
And here are some good explanations - the first one is on the adoption credit specifically and the second one is how tax credits in general work:
Adoption Tax Credit - How to Claim the Adoption Credit
Tax Credits - Preparing Your 1040 Step 7

Best wishes!

[DianeS]

All right, let's start at the beginnning.

First, WHEN can you claim adoption expenses against the adoption tax credit:

If the adoption is an international adoption, you may use the adoption tax credit for the tax year in which the adoption was finalized. So if you adopted internationally and the adopion was finalized in 2009, then you claim your expenses when you do your 2009 taxes (usually April 2010).

If the adoption is a domestic one, you may start to use the adoption tax credit in the year AFTER you paid the first expense. (Regardless of whether the adoption is final or not.) But each year you can only use it for expenses paid that one previous year. So if you adopted domestically, and paid expenses in 2008, then you may claim those 2008 expenses when you do your 2009 taxes (usually in April 2010). You may continue to do this for as long as you are paying expenses without a finalized adoption (pay expenses in 2009, claim them on 2010 taxes. etc)

Still talking about domestic, when you finally do finalize the adoption, then you may claim two year's of expenses at once - the expenses from the previous year that you were going to claim on this year's taxes anyway, PLUS any expenses paid in the year the adoption became final. When the adoption becomes final, you don't need to worry about that "year AFTER" thing anymroe, you claim whatever is left.

Does that make sense? From your post, assuming you're adopting internationally, this 2009 tax season you get to claim the expenses you paid in 2008. If your adoption becomes final in 2009, then in the 2009 tax season you also get to claim the expenses paid in 2009. If your adoption does not become final in 2009, then you have to wait until the 2010 tax season to claim the expenses you paid in 2009.

Now, WHAT and HOW MUCH you can claim:

To start with, there are income limits at which the adoption tax credit starts to phase out, and at which your income is considered high enough that you are not allowed to use it at all. I don't know the exact numbers, but if your yearly income is around $170,000 or higher, consult the IRS website to find the exact numbers at which it phases out.

Qualified adoption expenses are determined by the IRS. They keep a list on their site "www.irs.gov" and you can search for "qualified adoption expenses". Pretty much anything you were required to do for the adoption is a qualified adoption expense. The cost of the homestudy, fingerprints, fire extinguishers, mandatory travel, any classes like First Aid or CPR, etc. All those are qualified adoption expenses.

The federal adoption tax credit currently stands at a maximum of $11,650. That means this is the maximum amount anybody can claim for the adoption of one child. (If you adopt a sibling group, you get one credit PER CHILD. Two kids = two credits. Three kids = three credits.)

But, the other possible maximum that you can claim has to do with your individual taxes. Every individual or married couple has what is called a TAX LIABILITY. This is the amount of money that you earned, that you send to the IRS, that the IRS *KEEPS*. REgardless of how the IRS receives your money, and regardless of whether they send some of it back to you when you file your taxes, what we are talking about is the amount of your money that the IRS *KEEPS* each year.

For some folks, the IRS keeps a few thousand dollars each year. Those folks would get up to that amount back from the IRS in the year that they adopt a child and claim their expenses against the adoption tax credit. If he IRS keeps, say $4,000 of their money each year, then those folks can claim up to $4,000 of qualified adoption expenses on their taxes, and the IRS would return that money instead of keeping it.

Now, even if that family spent, say $10,000 on their adoption, the fact that their TAX LIABILITY is only $4,000 means they can only claim $4,000 of their adoption expenses in that year. They have to wait until the following year to claim the remaining $6,000. (Yes, you can claim the unused parts of your adoption tax credit in following years, but since the government hasn't renewed the adoption tax credit, the jury is out on how long you can claim it for - whether that rollover expires with the credit itself, or not. It also doesn't help the OP' question of this tax year. So I won't go into the rollover part at all beyond this.)

And there are some folks, for whom the IRS keeps nothing. They have a low enough income, or a high enough number of deductions, that when everyone is finished sending money back and forth, the IRS doesn't have any of their money. Therefore the IRS has nothing to send back to these folks, no matter how much of qualified adoption expenses they spend. They do not benefit - at all - from the adoption tax credit.

Lastly, let's talk about whether you actually get anything "back" from the IRS or not:
If you pay the IRS tax money regularly - through paycheck deductions, quarterly installment payments, etc, then the IRS has your money, and after you file your tax forms claiming the adoption tax credit, you will get money back from the IRS (some of it or all of it, depending on how the numbers work out).

But, if you are waiting until April and planning on sending in a check to the IRS, thn the IRS does not have your money, and therefore cannot send you any of it. You already have it, and you simply do not have to give it to the IRS (some of it or all of it, depending on how the exact numbers work out).

So remember you only get *back* money if the IRS already has it and can send it back to you.

So let's talk about the numbers you put in your post:
Now about your specific example again, you spent waaaay over the maximum amount of the credit. In 2008 you spent $23,000. In 2009 you spent even more. But the maximum amount you are going to be able to claim is $11,650.

You will not be able to pay off the entire $12,000 loan from this year's taxes. But you may be able to pay off most of it, depending on your TAX LIABILITY.

Pull a copy of last year's taxes that you filed. On that form is a line that says TAX LIABILITY. It's the line that is filled out from the tax tables. It'll be near the end, but the exact line number depends on the exact form you fill out, so you'l just have to hunt for it.

When you find it, that is the amount of your money that the IRS kept last year. If you haven't had any drastic changes in your income, dependents, etc since last year, then this year's tax liability is likely to be similar. That number is the amount that you are *likely* to benefit from the federal adoption tax credit. (To a maximum of $11,650 per child.)

It may be $0. It may be a couple hundred or a few thousand. If that tax liability number is greater than $11,650, remember that $11,650 is still the maximum you can claim per child. So at the most, you will get $11,650. But it may be significantly less, depending on what your tax liability and total yearly income are.

I know this post is long and detailed, but if you work through it one line at a time, you will arrive at the answer.

I wish you luck!

[aclee]

Why will she only be able to claim 11K? I thought the adoption credit increased to 12K?

[DianeS]

Originally Posted by aclee

Why will she only be able to claim 11K? I thought the adoption credit increased to 12K?

Good catch. I don't read the IRS website every month, just most of them.

Looks like the maximum amount for 2009 has been published - it's $12,150. The $11,650 amount I quoted was from 2008 as I didn't know they'd released a 2009 number yet. So if the OP does have enough tax taken out each year, that the IRS still has at the end of the year, that loan might be able to be paid off in full.

And here's those phaseout income amounts for 2009 while I'm at it: These amounts are phased out if your modified AGI is between $182,180 and $222,180. You cannot claim the credit or exclusion if your modified AGI is $222,180 or more.

[sambob]

It's really not as simple as paying out expenses for an adoption, and getting the money back when you file your taxes. It's too hard to explain here - you should really talk to a tax professional who can look at your particular tax situation and see if you qualify for it. He/she can also explain how it's applied, and how long before you receive the entire credit (it can be stretched out over a 5-year period). Oh, and it doesn't matter when you start the process or when you finalize, I think you start taking the credit in the year you paid out the expenses. So if you paid out $5,000 in November 2007, and $3,000 in January 2008, you would claim those amounts in two different tax years, up to the maximum (or what you qualify for) for a single adoption. It's all very confusing, which is why I urge you to talk to someone who really knows.

[Beth.]

Originally Posted by sambob

It's really not as simple as paying out expenses for an adoption, and getting the money back when you file your taxes.

Funny .... that's not what the agencies say.

I don't know how many times I've read "Total expenses = $XX,XXX - $12,000 tax credit. This adoption will only cost you $XX!!!"

Sorry to be sarcastic and take your thread OT!

[Nevada Jen]

I think its really inappropriate that the agencies make you think you are getting back 12K. Without at least trying to explain it to you. I mean they actually have your past years' taxes in hand. They are the one who are in the best position to explain it to a prospective adoptive parent. Its actually pretty easy to explain face to face with the documents in hand. Its just really hard to understand it in writing. Plus, a lot of accountants do not understand how it works either.

[CAToso]

DianeS - thanks for posting all that detail. I always cringe when I see people giving/receiving the "short answer" on adoption tax credit, because if they're counting on getting a $12,000 check, they could be in big trouble.

(I also didn't realize we could claim the credit for a domestic adoption even if not finalized. Does the adoption have to be "identified" to claim a credit? We will have a lot of expenses in 2009 - mostly in the form of the agency activation fee - but we are not even to the "matched" stage yet.)

~Courtney

[triciansil]

I'm with ya on the confusion It is funny because our tax lady and adoption worker have both told us we will be getting the total back as in a refund but I am pretty sure that is not how a "tax credit" works??

[DianeS]

Originally Posted by CAToso

DianeS - thanks for posting all that detail.

Aw, you're welcome!

I also didn't realize we could claim the credit for a domestic adoption even if not finalized. Does the adoption have to be "identified" to claim a credit? We will have a lot of expenses in 2009 - mostly in the form of the agency activation fee - but we are not even to the "matched" stage yet.

The adoption does not have to be identified, or to be in any particular stage of the process. Any qualified adoption expense counts, if the purpose was for an adoption. (Most of those early costs are obvious - a homestudy, an application type fee to an adoption agency, etc.) You don't need to submit receipts with your taxes, but you do want to keep them, label them, and store them in case of an audit.

And remember, you can't claim those 2009 expenses until you do your 2010 taxes (usually filled out in April 2011). You could well have a match, or even a finalization, by that point. And the tax law could easily be re-written by that point, too. The federal adoption tax credit is about to expire, and it could be renewed the same way, renewed in a different form, or not renewed at all. So don't count your chickens before they're hatched!