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Tax Credit Question

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Tax Credit Question  Reply with quote  

Howdy folks,

I have a couple of tax questions. My wife and I are saving for an adoption, which is quite expensive up front, but it turns out there are a lot of tax breaks / benefits that appear to give a lot of that money back.

Please tell me if you can if I am interpreting this information correctly. It gets complicated fast, but I will try to keep it as short as possible.

Adoption Cost Estimate: $25000
Tax Credit from US Gov: $10000 (a little over actually..but I'll round off.)
Adoption reimbursment from my company: $2500
Adoption reimburstment from my wife's company: $3000
Child Tax Credit: $1000
Current Savings: $8000...should be around $14000 when we start the process next year.

Basically, the tax credit is a dollar for dollar reduction of my tax liability correct? Is that just applied to my income tax owed?

My wife and I typically get $100 - $300 dollars back as a refund, so we have our taxes balanced about right. My federal income tax paid total for 2006 was $4537

The $10000 tax credit is allowed to carry over for up to 6 years until it is all used. Additionally, all expenses that are not reimbursed by our companies that relate to the adoption will be tax deductible.

So...if I am reimbursed $5500 out of $25000, I should be able to deduct the remaining $20000 from my taxible income? That is huge!?

My wife and I have an adjusted gross income right now of about $44000 dollars (About $68000 gross with $24000 of deductions)...this would reduce it to about $24000?? That would mean my typical tax paid of $4500 would be way too much and we'd get a big refund that first year right? The small amount I might owe from $24000 income taxible would be reduced to zero by the $10000 credit right?

And the following year two years the $10000 tax credit and $1000 child credit would essentially reduce our income tax bill to zero?

Am I missing something here? I plan to get a HELOC to finance the remaining $11000 or so of adoption expenses since I would be able to write checks against it as needed and only pay monthly on the current balance...with tax deductible interest.

Then, the tax refunds would repay the HELOC and then some if we still had a balance.

Am I misunderstanding the way a tax credit works? Thanks in advance and sorry for the long post. (Time is of the essense as some of these benefits are set to expire in 2010 if Congress does not extend them.)
Post Fri Jan 05, 2007 8:45 pm
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Look over irs.gov Form 8839 and instructions. It looks like any employer reimbursement is not taxable (within limits), but may subtract from the tax credit unless it is a disabled or special needs child. So unless the child fits that category, your tax deduction might be $10,960 minus the untaxable employer reimbursement, plus dependent tax credit elsewhere on 1040.

The tax credit is a credit against tax due, but you cannot expect to get tax credit for the tax free employer reimbursement (unless a special needs child).

But I am no tax expert, so fill in some hypothetical figures and see how it works out. Just be aware that current forms are 2006 tax year, so things may be off a year (but probably just related to credits from previous years).
Post Sun Jan 07, 2007 5:49 pm
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Here's something from the IRS website: http://www.irs.gov/taxtopics/tc607.html

TurboTax Deluxe has Form 8839 in it, so plugging all those numbers into TurboTax ought to give you an answer.

One thing to keep in mind about tax credits is that if the credit exceeds the tax, then you lose the excess credit.

Post Sun Jan 07, 2007 8:18 pm
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<<One thing to keep in mind about tax credits is that if the credit exceeds the tax, then you lose the excess credit.>>

Thanks for the replies. I will probably use Turbotax for a "what if?" scenario at least.

I know in the case of the $10,000 tax credit, you are allowed to carry it over for up to 6 years until you have received the full benefit. i.e. if your tax bill were only 2k per year, you would be able to use the credit for 5 years.

I will look for clarification of the employer reimbursements. The one article I read on that said that expenses that I was reimbursed for would no longer be tax deductible, but I have not seen where it effected the tax credit. (If it effected the tax credit, then I would be better off not getting the employer reimbursement? As then, I could claim the expenses as deductions and still get the full 10k tax credit as opposed to not being able to claim the expenses as deductions and getting the tax credit reduced by more than 1/2.)
Post Mon Jan 08, 2007 12:56 pm
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