Ask The Experts: Adoption Credit Needs New Paperwork
August 22, 2011 (The Sacramento Bee) IRS expert Jesse Weller takes up readers' questions on two topics: adoption tax credits and quarterly tax payments.
QUESTION: I adopted two children in 2008 and 2009. I was told that for five years, I could claim the adoption tax credit. This year I was informed that federal law had changed and the adoption tax credit is now paid out as a refund. I have been waiting months to get my refund. What do I do?
ANSWER: The newly expanded adoption credit, which provides up to $13,170 per child, is the largest refundable tax credit available to individual taxpayers. It covers expenses related to legal adoption of a child, including court costs, attorney fees and travel expenses. Previously, it was set to expire in 2010 and was not refundable, only a credit against taxes owed. Under the federal Affordable Care Act, it's now refundable and extended through 2011.
Any taxpayer claiming the adoption credit must file a paper return, rather than filing electronically, because certain documents must accompany the return. It usually takes six to eight weeks to receive a refund from a complete, accurate paper return.
However, some taxpayers claiming the adoption credit are experiencing longer processing times. This is usually because of a failure to include required documentation, such as an adoption order or decree. Also, verification of the submitted documents sometimes causes delays.
While the IRS is committed to processing adoption credit claims quickly, it must also safeguard against improper claims by ensuring that the requirements are met. The IRS appreciates the patience of those providing documentation.
If you are owed a refund separate from the adoption credit, you will receive that refund while the review of your adoption credit is conducted.
If you replied to an IRS notice about your tax return, allow at least six weeks for a response. If you do not receive a reply within that time, call the number on your IRS notice.
For more information, go to http://www.irs.gov, under the "Individuals" tab: "Adoptive Parents: Don't Delay Your Adoption Credit Refund."
Q: I'm a Realtor (selling two or three homes per year); my spouse is not working. I have not paid my quarterly taxes as I am the only source of income. Will I get hit with state or IRS penalties, if I choose to pay on April 15 instead? I have another job where taxes come out of my paycheck.
A: You are right to want to make sure you don't get penalized for having too little federal income tax paid throughout the year. Plus, paying taxes during the year prevents the possibility of facing a large tax bill that may be too difficult to pay all at once.
When taxpayers receive income that is not subject to withholding, such as self-employment (which I assume is your situation) or capital gains from the sale of property, they may need to make estimated tax payments to avoid a penalty for underpayment of estimated tax.
Generally, to avoid a penalty in 2011 you must pay estimated taxes if you expect to owe at least $1,000 in tax (after subtracting your federal income tax withholding and credits), and you expect your withholding and credits to be less than the smaller of either 90 percent of your 2011 taxes, or 100 percent of the tax on your 2010 return. There are special rules for farmers, fishermen, certain household employers and certain higher-income taxpayers.
IRS Publication 505, Tax Withholding and Estimated Tax, explains the rules and how to avoid the penalty. Form 1040-ES, Estimated Tax for Individuals, has a worksheet to estimate your 2011 tax and comes with vouchers for making estimated payments.
Because it can be hard to come up with the quarterly payments, another option allows you to make smaller payments more frequently. Under this method, you give your employer a new Form W-4, Employee's Withholding Allowance Certificate, to increase the federal tax withheld from each paycheck. The IRS website has an excellent tool, the Withholding Calculator, to help taxpayers fill out a new W-4.
You can download IRS forms from the website, http://www.irs.gov/, or order them by calling 800-TAX-FORM (829-3676).
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