The Adoption Tax Credit Explained
Original Source: http://www.mothering.com/discussions/showthread.php?t=515556
By Sharon, aka sak9645
Please note particularly the section on total tax liability, as you are
misunderstanding the concept. It does NOT mean how much you have to pay
on April 15 or how much you get back because you overpaid during the
year. It means the total amount you owe, based on your income, BEFORE
you consider how much of it you already paid through your payroll
deductions or estimated tax filings.
For more detail, download from the IRS website the Adoption Tax Credit
Form 8839, the Instructions to Adoption Tax Credit Form 8839, and Tax
Topic 607. I'm not an accountant, so you may want to talk with your tax
adviser and look at some tax software, as well.
The adoption tax credit is available to most adoptive families. It
doesn't matter whether you adopted domestically or internationally.
The rules are a little different for international adoptions (whether
of healthy or special needs children) versus domestic healthy child
adoptions, versus domestic adoptions of children with special needs.
The tax credit is per child. If you adopt two children at the same
time, you can get two credits, as long as you meet the requirements
below.
I'm going to go through the process for international adoption. Someone
can pipe up and highlight the differences for domestic adoption, if
he/she wishes.
Basically, to be eligible for the tax credit, you must fulfill ALL of
the requirements below:
a) Have had a full and final adoption. If your child comes home on an
IR-3 visa, meaning that both spouses in a married couple, or a single
parent, saw the child prior to the overseas finalization, the IRS --
like the USCIS -- considers the adoption to be full and final in the
year you bring your child into the U.S., so you can take the credit in
that year. If your child comes home on an IR-4 visa, the IRS -- like
the USCIS -- does not consider your adoption to be full and final until
you have readopted your child in your home state or, where it is
allowed, obtained state "recognition" of your child's foreign adoption,
and you cannot claim the credit until the year in which the readoption
or recognition occurred. You CANNOT claim the credit for expenses
occurred in a failed adoption, like you can with a domestic adoption.
b) Have incurred some qualifying adoption expenses. If you have
incurred at least $10,390 in qualifying adoption expenses, and most
internationally adoptive parents do incur at least that much, you can
claim the full tax credit if you meet all the other qualifications.
(The $10,390 figure adjusts each year due to inflation and this is
actually the 2004 figure.) If you have incurred less than $10,390 in
expenses, you can claim part of the tax credit, if you meet all the
other qualifications. Note that you could have incurred these expenses
in years before you finalize; it doesn't matter.
c) Have adjusted gross income (AGI) of less than $195,860. If you earn
over that amount, you cannot claim the tax credit at all. If your AGI
is less than approximately $150,000, you can take the full credit, if
you qualify in all other ways. If you earn between that amount and
$195,860, you can take partial credit.
Here's how the credit works:
First, get comfortable with the concept of "total tax liability". On
your 1040 tax form, whether or not you are adopting, there will be a
place where you figure how much tax you owe in total, based on your
income and deductible expenses. It is calculated BEFORE you figure out
how much you already paid of that tax via your payroll deductions or
estimated tax filings, and whether or not you will have to pay anything
or be able to get a refund on April 15.
The adoption tax credit simply reduces your total tax liability by
$10,390. If you don't have $10,390 in total tax liability in the year
you claim the tax credit, you can carry the unused credit forward for
five additional years.
Let me give you some examples. I will assume here that the person
qualifies for the full tax credit, based on income and such, for one
child. I will use the male pronoun, simply to avoid the cumbersome
"he/she". The tax credit, of course, can be taken by a single person
(male or female), or by a married couple filing jointly. Consult your
tax advisor if you are married and filing separately. I will also use
round figures, such as $10,000, rather than the actual numbers like
$10,390.
a) A person's total tax liability, without considering the tax credit,
is $10,000. He paid the full $10,000 of this through payroll deductions
for taxes during the year. If he had not adopted, he would not have
owed any money on April 15 and would not have gotten any refund. Since
he adopted, his total tax liability is reduced to zero. Therefore, he
overpaid his taxes by $10,000, through his payroll deductions, and this
amount will be refunded to him.
b) A person's total tax liability, without the tax credit, was $10,000.
He paid $8,000 of this amount through payroll deductions during the
year. If he had not adopted, he would have owed $2,000 on April 15 (the
difference between tax liability and amount paid). Since he adopted,
his total tax liability is reduced to zero. Therefore, he overpaid by
$8,000, which will be refunded to him.
c) A person's total tax liability is $10,000. He did not pay any tax
through payroll deduction or estimated tax filings during the year. If
he had not adopted, he would have owed $10,000 on April 15 (plus,
probably, some penalties for underwithholding tax). Since he adopted,
his total tax liability is reduced to zero. He does not owe any tax and
he does not get any refund.
d) A person's total tax liability is $10,000. He paid $12,000 through
payroll deductions. Normally, if he had not adopted, he would have
received a refund of $2,000, since he overpaid his taxes by that
amount. Since he adopted, his total tax liability is reduced to zero.
Since he paid $12,000 through his paychecks, he will get, instead, a
refund of the full $12,000.
e) A person has a total tax liability of $6,000. He paid the full
amount through his payroll deductions. Normally, he would not owe
anything on April 15, and would not get a refund. Since he adopted, he
can use $6,000 of the tax credit to reduce his total tax liability this
year to zero. That means he overpaid his taxes by $6,000 and will get
that amount as a refund. In addition, he has $4,000 of unused credit to
carry over to next year's taxes.
A person has a total tax liability of $6,000 and did not pay any taxes
through payroll deduction during the year. Normally, he would owe
$6,000 on April 15, and, probably, a penalty for underwithholding.
Since he adopted, he can use $6,000 of his credit to reduce his tax
liability to zero. Therefore, he would owe no tax this year. He also
has $4,000 of credit to use next year.
The bottom line is that the tax credit is a big help to many taxpayers.
It can either increase their refunds or reduce the amount of tax they
must pay.
I hope this is helpful.
Sharon