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A reader recently posted a question on one of my blogs as a comment. She asked me if the adoption tax credit could help to eliminate a person’s self-employment tax. This reader was understandably confused when she was told that the adoption tax credit did not apply to the self-employment tax. Surprisingly, I can answer this question. In my previous life, before adoption, I was an accountant. In addition, Super Dad and I completed two adoptions in 2007 and I earned money from self-employment (blogging) in 2007. Therefore, our tax return may be very similar to this reader’s tax return. The maximum tax credit that can be taken for each adoption in 2007 is $11,390. However, the credit is not a refundable credit. This means that it can only eliminate your income tax. Therefore, if your income tax owed for 2007 was $5,000 for example, the adoption credit would wipe out the $5,000 and you would carry the credit balance of $6,390 to your 2008 tax return. The adoption credit can be carried forward up to five years. Of course, if you had a large income, you might use the entire credit in one year.
Have a question – not sure if this is the right forum – please direct me – does the adoption tax credit really not cover self employment tax? Our accountant just said so and I can’t find it anywhere on the IRS site or any adoption site. Anyone know? Barbara
Of course, an $11,390 credit doesn’t seem like much when you see adoptions that cost between $20,000 and $40,000. Many people are lucky enough to have employers who will pay up to half of their adoption costs. While they cannot deduct the portion that their employers paid, this could allow some people to possibly afford a higher priced adoption.
Now, let’s look specifically at page two of the 1040 form. Your taxable income is totaled on line 43. Your tax liability is calculated on your taxable income (line 43.) Your tax liability goes on line 44 and if you are not subject to the alternative minimum tax then the same number goes on line 46. Lines 47 through 55 are where the tax credits go for which you are eligible. These can reduce or eliminate your tax liability, which is the number you entered on line 46. These credits include child and dependent care, elderly or disabled, education, energy, foreign tax, retirement, and your adoption tax credit (line 54, form 8839), as well as a few others. At this point your tax liability might be zero.
However, now you come to the section of other taxes on lines 58 through 62 that are totaled on line 63. These include the self-employment tax (line 58), unreported social security and Medicare, tax on IRAs, EIC payments, and Household employment taxes. These taxes are added together with your tax liability on line 56 and totaled on line 63. (Remember: line 56 may have been zero after your adoption tax credit but these taxes are now added to it.)
Line 64 through 71 include the total payments made towards your income tax liability. If you were employed besides having self-employment income then your employer withheld federal income tax, (FICA goes on line 64.) Other items that are considered payment can go here such as earned income credit (EIC) excess social security, and excess child tax credit if you have more than three children. These credits are refundable credits. That means that you could get more money back then your employer withheld. These ‘payments’ can zero out your self-employment tax or other taxes from line 63.
If you did not have any other income or payments, then you would owe your self-employment tax even though you had the adoption tax credit. I hope this information helps. Taxes are so much fun!
Photo Credit Julia Fuller 2008 Tax form IRS form 1040 (2007) page 2
