Adoption Tax Credit Update

lafayettegirl

Both the House and Senate passed the fiscal cliff legislation, which included the Adoption Tax Credit. Here is more specific information:

Taxpayers that adopt children can receive a tax credit for qualified adoption expenses. A taxpayer may also exclude from income adoption expenses paid by an employer. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) increased the credit from $5,000 ($6,000 for special needs) to $10,000, and provided a $10,000 income exclusion for employer-assistance programs. (The Patient Protection and Affordable Care Act of 2010 extended these benefits to 2011 and made the credit refundable.) The bill extends for taxable years beginning after December 31, 2012, the increased adoption credit amount and the exclusion for the employer-assistance programs as enacted in the EGTRRA (which means the credit is NOT refundable).

The bill is now awaiting signature by the president so it can become law.

Rachel Sonnier

Thanks for the info! I know everyone would prefer if it were refundable, but I think the extension will be helpful anyway. I feel as though I pay enough taxes that not having that burden (even if its is just the year we finalize) is nothing to sneeze at, and def better than nothing at all! ;-)

Unless I am totally misunderstanding what all of this means...which is totally possible! 

lafayettegirl

You got it. It won't help everyone, but it was this option or the complete elimination of the credit. There was no "option B" and no wiggle room to amend or change the language.

MagickalNarwhal

Thank you so much for sharing these updates!

AwBeth

I am kind of tax-dumb --- can someone explain it in really simple terms?  What is the difference between it being refundable and not?  

stinkerbell6879

:::::IF Lurker:::::

By any chance do you know if the Family Act was included in any of these talks? I can't seem to find anything?

12bailey18

AwBeth:

I am kind of tax-dumb --- can someone explain it in really simple terms?  What is the difference between it being refundable and not?  

I need help too figuring it out...LOL.  

dholsapp

This is from a previous post from one of our fabulous ladies who explained it REALLY well!

 

MagickalNarwhal:

Last year it was a refundable credit, this year it's a non-refundable credit. The difference is that a refundable credit comes back to you even if you don't have a tax liability. So, last year, you could have had zero income, but still file and get the entire amount of the credit refunded to you.

This year, it's a non refundable credit, so all it can do is wipe out your tax liability. If there's more $$ left from the credit, it gets carried forward on to your next years' tax return to wipe out tax liability there, and can be carried forward for a total of 5 years.

Example (totally not actual or accurate numbers, just for simplicity's sake):

Total taxable family income: $50,000

Say they are in a 10% tax bracket. That would mean that the family's tax liability is $5,000.

Also, say they had $6,000 withheld for fed taxes from their checks throughout the year.

If they had filed the ATC in 2011, the $13,000 (not the exact # but again I'm using this for simplicity) credit would FIRST wipe out the tax liability - down to zero. So, since they don't have a tax liability for the year, they would have gotten back the entire $6,000 that had been withheld. Then they would ALSO be able to get the remaining $8,000 that was left in the ATC back, so they would have gotten a total refund of $14,000 - the $6,000 that had been withheld, and the $8,000 for the refundable ATC.

THIS YEAR...same scenario, with two differences. First, the amount is smaller for this year - closer to $12,000, so after wiping out the tax liability there would only be $7,000 "left over". The second difference (which is way more significant) is that the $7,000 left over from the ATC can't get refunded to them. So, this year, they'd get their $6,000 back that had been withheld and that's it. HOWEVER, next year when they file, they can again use the ATC to wipe out any tax liability.

Without the ATC, in both years they would only get back $1,000 (they has $6,000 withheld but only needed $5,000 to cover their tax liability, so that other $1,000 would come back to them).

We finalized this year as well, which I am very glad about. If no other changes are made I believe that it's set to revert to VERY old levels - around $6,000? Any it may be only for special needs adoptions. But no one really knows what will happen to it in the future.

Julie721

Ok adoption tax credit experts... another question for you:

How does it factor in if your employer helps with adoption expenses? For example, say you have $12,000 of eligible expenses, and your company gives you $5,000 for adoption expenses, can you still get all $10,000 from the credit? 

Rachel Sonnier

Julie721:

Ok adoption tax credit experts... another question for you: How does it factor in if your employer helps with adoption expenses? For example, say you have 12,000 of eligible expenses, and your company gives you 5,000 for adoption expenses, can you still get all 10,000 from the credit?nbsp;

I wondering about this as well. DHs employer also gives 5,000 for adoption expenses. What does the part that says "A taxpayer may also exclude from income adoption expenses paid by an employer" mean exactly?

MagickalNarwhal

Julie721:

Ok adoption tax credit experts... another question for you:

How does it factor in if your employer helps with adoption expenses? For example, say you have $12,000 of eligible expenses, and your company gives you $5,000 for adoption expenses, can you still get all $10,000 from the credit? 

No, first you apply the exclusion for the $5,000 that your company gave you. That leaves you with $7,000 of expenses that you paid "out of pocket". When figuring the credit, the $10k is max but the amount of the credit is *up to* the amount of your eligible expenses, so in this case, you'd get a credit for $7,000 (the amount of your expnses after the exclusion).

The IRS page has a few other examples on their tax topic page: https://www.irs.gov/taxtopics/tc607.html

MagickalNarwhal

Rachel Sonnier:

What does the part that says "A taxpayer may also exclude from income adoption expenses paid by an employer" mean exactly?

The way the tax code is written, all forms of income (or anything that comes to you that has value) is taxable to you UNLESS it's specifically *excluded* by another piece of the tax code. So normally, if your employer gave you $5,000 it would be taxable income to you and it would probably be included in with your W-2 income amount. With the adoption tax code, that money is excluded from being taxable to you.

I'm not sure the mechanics of how it works because we weren't eligible for any benefits like that from our employer, but I would guess (totally a guess) that the $$ your employer gave you *would* be included on the W-2, then you'd subtract it back using the form you use to claim the adoption tax benefits.

Rachel Sonnier

Thanks! 

Somebody who understands this better than I do tell me if I'm missing something here.

In theory, if you pay in excess of $10,000 per year in taxes (as per your line 55 on the long form), and also get $ from your employer...if you have spent over those combined amounts in "applicable" adoption expenses, nothing will change for you and you will still get the $10,000 back on your return, in addition to the employee benefit you received from work? I feel like that sounds too good to be true.

MagickalNarwhal

Rachel Sonnier:

Somebody who understands this better than I do tell me if I'm missing something here. In theory, if you pay in excess of $10,000 per year in taxes, as per your line 55 on the long form, and also get $ from your employer...if you have spent over those combined amounts in "applicable" adoption expenses, nothing will change for you and you will still get the $10,000 back on your return, in addition to the employee benefit you received fror work? I feel like that sounds too good to be true.

Without seeing your return and knowing if there are any other factors and assuming I'm understanding your questions correctly, yes, that would be true that you would effectively get the entire $10k credit back, PLUS not have to pay taxes on the money you got from your employer.

It's pretty intensely phenomenal. That's why it took so many people so long to get the credit - it's SO good that fraud would be a major deal and the IRS has to go through a lot of hoops to make sure it's claimed correctly (and they don't have a very good system set up for doing so).

Rachel Sonnier

MagickalNarwhal:

Rachel Sonnier:

Somebody who understands this better than I do tell me if I'm missing something here. In theory, if you pay in excess of $10,000 per year in taxes, as per your line 55 on the long form, and also get $ from your employer...if you have spent over those combined amounts in "applicable" adoption expenses, nothing will change for you and you will still get the $10,000 back on your return, in addition to the employee benefit you received fror work? I feel like that sounds too good to be true.

Without seeing your return and knowing if there are any other factors and assuming I'm understanding your questions correctly, yes, that would be true that you would effectively get the entire $10k credit back, PLUS not have to pay taxes on the money you got from your employer.

It's pretty intensely phenomenal. That's why it took so many people so long to get the credit - it's SO good that fraud would be a major deal and the IRS has to go through a lot of hoops to make sure it's claimed correctly (and they don't have a very good system set up for doing so).

 

Wow! That would be such a blessing for us when the time comes. And I agree. I feel like almost every aspect of adoption involves a lot of hoops, but all for very good reasons. Thank you so much for all of the info!! :-) 

AwBeth

Thank you so much for the explanation.  We always get a refund back (I know, I know, we should set it up differently, but that's how we choose to do it).  So does that mean we should choose not to take out taxes the year after we finalize the adoption?  It sounds like that's the only way to get the credit.  Am I understanding that correctly?  

MagickalNarwhal

AwBeth:

So does that mean we should choose not to take out taxes the year after we finalize the adoption?  It sounds like that's the only way to get the credit.  Am I understanding that correctly?  

No, that won't have any effect on whether or not you get the credit. I think you are getting "tax liability" confused with a balance due when you file. The credit will reduce or eliminate your tax liability. Once that's figured, it's compared to how much money was withheld from your checks throughout the year. If you had more withheld that you needed, you get a refund, if you had less withheld than you needed then you have a balance due.

If you changed your withholdings to have less taken from your checks throughout the year, then you will just get a smaller refund when you file (because you would have gotten sone of it "in advance" in the form of bigger paychecks).

It's confusing, hope I'm explaining it OK.

AwBeth

MagickalNarwhal:

AwBeth:

So does that mean we should choose not to take out taxes the year after we finalize the adoption?  It sounds like that's the only way to get the credit.  Am I understanding that correctly?  

No, that won't have any effect on whether or not you get the credit. I think you are getting "tax liability" confused with a balance due when you file. The credit will reduce or eliminate your tax liability. Once that's figured, it's compared to how much money was withheld from your checks throughout the year. If you had more withheld that you needed, you get a refund, if you had less withheld than you needed then you have a balance due.

If you changed your withholdings to have less taken from your checks throughout the year, then you will just get a smaller refund when you file (because you would have gotten sone of it "in advance" in the form of bigger paychecks).

It's confusing, hope I'm explaining it OK.

You are explaining it perfectly -- I am just ignorant about taxes!  My FIL is a tax attorney, so I will have a pow wow with him and get it straightened out.  Thank you so much! 

HouseofLovelock

Just saw this, it made me super sad since it won't help us if we adopt this year.  

MagickalNarwhal

You should file anyway, since it carries forward for up to 5 years. If you are just having a single year where you won't have taxable income, you may still benefit in future years when you do. Also, you would claim the credit in the year you finalize, so if you adopt in the early part of the year, you'd take it on your 2013 taxes, but if you got a placement later in the year, or if your adoption took a whole to finalize ours took 7 months then you'd file it with your 2014 taxes.