[SJBundy]

Can anyone give us some info on how the adoption tax credit works?

We began our adoption process in July of 2004 and completed our adoption in March of 2005.

Our adoption expenses in 2004 were around $18,000, and our adoption expenses in 2005 were around $11,000. And when we did our taxes today with TurboTax Deluxe, we were given the adoption tax credit of $10,630.

The catch is the adoption tax credit of $10,630 will be applied in the sum of around $5,600 for the 2005 tax year while a carryover of around $5,100 will be applied for the 2006 tax year.

Can anyone tell us if this sounds right? We were thinking the entire $10,630 adoption tax credit would be applied to our taxes this year considering our adoption process began in 2004 and was finalized in 2005.

We understand the first part of the following off the IRS Web site -- "The adoption credit is an amount subtracted from your tax liability. Although the credit generally is allowed for the year following the year in which the expenses are paid, a taxpayer who paid qualifying expenses in the current year for an adoption which became final in the current year, may be eligible to claim the credit on the current year return."

The second part -- "Although the credit generally is allowed for the year following the year in which the expenses are paid, a taxpayer who paid qualifying expenses in the current year for an adoption which became final in the current year, may be eligible to claim the credit on the current year return." -- is a little confusing to us.

I guess we were thinking part of the $10,630 adoption tax credit would have been applied retroactive to our 2004 tax return, and we would then get the remaining sum of the adoption tax credit applied to our 2005 tax return since our adoption was finalized in 2005. In that way of thinking, we thought we would get the entire adoption tax credit of $10,630 this year.

Anyway, we hope we haven't confused anyone with this. We were just wondering how the adoption tax credit is supposed to be applied, and we were wondering if anyone else has had their adoption tax credit applied over two or more years.

We're guessing we're not alone on the subject, and we're also guessing we're not the only ones who have been a little surprised when preparing their taxes after their adoption was finalized.

Any thoughts are appreciated.

P.S.

We're attaching a couple photos. One of Adrian by himself, and one of Adrian letting everyone know he has his mama and daddy wrapped around his finger.

For all who have brought their children home from Guatemala, we hope you're having the time of your lives as we are. And for those waiting to bring their children home, know that the wait is well worth it and our hearts go out to you and the children.

[JohnnaMJH]

Awww, he sure is cute and you all look very happy. I do not think the tax credit would be retroactive to '04. It is for '05, the year the adoption was final, although it can include all the money spent, including in prior years. It does carry forward if your tax liability is not as much as the total credit.

We had a two year process begun in Nov. 02 and finished in Oct. 04. We didn't get anything retroactive at all.

I am not an expert at all, so hopefully someone else can pitch in. I do, however, have experience in an adoption that includes expenses over more than one tax year.

Good luck!

[Janette Monteil]

Yes. If you only use part of the credit you get the rest the following year. We carryover ours for a few years. You can only take the credit in the year it is final. So if it was final in 05 you can take it in 05 and forward. You can't go back unless it was final in 04.

[kelleymac]

You can take the entire adoption tax credit in the year your adoption was final. (because it was an international adoption.) You *should* be eligible for the entire tax credit on your '05 tax return.

Two caveats: if your income exceeds certain levels, your credit will be reduced. That's one reason you might be getting less. If you only had $5,000 in tax liability for '05, that's all you can get back. In both cases you can still carry forward the credit for up to 5-years until you use it all.

Be sure your accountant isn't confusing both domestic and international adoption. In domestic, you get credit for expenses incurred in the year you spent them, in international, you can only get credit (in the full amount) in the year the adoption was final, whether you paid for it all that year or not.

Kelley

[AwaitingBeloved]

I think it also has something to do with your tax liability. They can't give you back more than what your liability was for that year, so that's why it carries over. Something like that. Sounds right.

[lwils89701]

I adopted two children in 05 and had expenses in 04 and 05. I am entitled to 2 adoption tax credits, but will only see about $5000.00 this year because that is my tax liability.

Unlike some other credits, you are only allowed to claim the credit up to the amount of your tax liability (which of course is now reduced, because I have children). The remainder can be carried over for up to five years.

Like you, I discovered this later in the adoption process. It bites!