[oxford]

Please help to understand. If we adopt two children, anfd the fees were $35,000, I understood Federal Go gives around $12,000 per child. Could you explain the mechanism of it? What do they actually return in terms of real money? Is it my Fed taxes I paid , and how long I could keep filling after adoption? Is it as long as I return all of them or there is a limit?

It would be nice to pay some debt down after adoption, especially kids need so much things and attention

[DianeS]

It's not really difficult, there's just multiple steps to it.

First, make sure you, personally, qualify for the credit. The adoption tax credit amounts are phased out if your modified Adjusted Gross Income (AGI) is between $182,180 and $222,180. You cannot claim the credit or exclusion if your modified AGI is $222,180 or more.

Assuming you pass that part, take a look at how much of your income the IRS normally keeps. Whether you pay in paycheck deductions or you pay in a lump sum check when you file taxes, there will be an amount the IRS keeps after all refunds and everything are finished. That amount is called your TAX LIABILITY. For some people that amount is $0. For others its a couple hundred dollars. For others it is several thosand dollars.

Your TAX LIABILITY in the year you adopt is the maximum amount you might be able to benefit from the adoption tax credit. If you are one of the people who has a tax liability of many thousand dollars, then you'll benefit a lot. If your tax liability is only a few hundred, then you'll only benefit a little. If your tax liability is normally $0, then you won't benefit at all.

So now you should have an idea of whether you qualify at all, and whether you will benefit a lot or a little.

Your assumed adoption expenses in this post are way above the amount of the credit, so we won't address adoptions that cost less than that, we'll simply go with the assumption that you have way over the amount of qualifying adoption expenses than you can claim - most international adoptions are that way. So no problems with that part.

About the credit itself:
The maximum credit in 2009 is $12,150 per child. (So two kids would be a maximum of $24,300.)

So you take the maximum adoption tax credit, and subtract your tax liabilty for that year. That dollar amount on the answer line is the amount that the IRS would normally have kept of your money, but this year they will either send back (if the IRS already has it because you paid in paycheck deductions) or they simply won't collect (if you still have it because you were planning on mailing the IRS a check along with your tax forms).

Does that make sense? Please do post back if it doesn't.

If you are unable to claim the entire amount of the credit in the year you adopt, because your tax liability in that year is too low, then the amount of the credit that you didn't claim that year can be carried over to the next year. Most adoptive parents find themselves in this boat.

One caution - You can normally do that carryover for up to five years - whatever is left you carry to the next, whatever is left from that second year you carry over to the one after, etc. BUT the federal adoption tax credit is expiring at the end of 2010, and it may be that the carryover will expire, too. We'll have to wait until closer to that date to know for sure. But don't count on using it any longer than your 2010 taxes, because it may not be there.

[oxford]

Thanks a lot. It does have sense. But, when you say Tax LIABILITY, do you mean only federal taxes or both Fed and State? I paid about $7,900 Fed taxes this year and about 3,000 CA taxes.

Will IRS return the Fed by check, the whole sum assuming I spent $35K for both kids, and they adoption became final in 2010?

[Mykidsmom]

Some states have the adoption tax credit some do not.

[DianeS]

Originally Posted by oxford

Thanks a lot. It does have sense. But, when you say Tax LIABILITY, do you mean only federal taxes or both Fed and State? I paid about $7,900 Fed taxes this year and about 3,000 CA taxes.

Will IRS return the Fed by check, the whole sum assuming I spent $35K for both kids, and they adoption became final in 2010?

Just federal. It's a federal adoption tax credit. If your state has one as well, then it may have different rules that you'd have to look into differently.

If you paid your $7,900 to the IRS through paycheck deductions, then when you file your federal taxes and claim the adoption tax credit for the year you finalize your adoption, the IRS will send you a check for the $7,900.

Then, $24,300 minus $7,900 equals $16,400 that you can carry over to the next tax year, assuming that the carryover rules are not eliminated.

Sixteen thousand is a large chunk of money - I suggest you write to your congressmen and strongly urge them to support extending the federal adoption tax credit beyond it's current expiration date of Dec, 2010! You don't want to lose that carryover amount if you can avoid it.

Hope that helps!