Thursday, December 31, 2009

YOUR Tax Questions Answered! (Round 2)

You guys have sent me some great tax questions! Here are the latest:

Q) I was wondering how our Bankruptcy will affect our taxes this year? Does it? What should I expect?

A)Your bankruptcy should have essentially no effect on the tax return itself. Debts that are discharged as part of a bankruptcy proceeding are not income to you as an individual taxpayer. Now, the type of bankruptcy you have may impact your refund. Your attorney and/or bankruptcy trustee should have identified for you if you are required to send part or all of your refund to the trustee. I have seen several cases where taxpayers who have filed a Chapter 13 bankruptcy (Reorganization of Debt, vs the Chapter 7 Elimination of Debt) must turn over half of their refund. In all likelihood, if your attorney or trustee didn't mention it, it probably doesn't apply to you. But let's face it - they are tossing around a lot of stuff, most of it with big, legal-y words, and if you aren't for sure, it cannot hurt to ask.
Now, the last thing I will tell you is that it's not unusual for creditors who's debts have been discharged as part of bankruptcy to still send a form 1099-C, Cancellation of Debt. They aren't really supposed to, but it happens. If you get one, include a federal form 982 with your return. Bankruptcy is a Title 11 case, and is the first reason you may be able to exclude cancelled debt from income. 

Q) Can you explain how the adoption tax credit works?  

Oh the novel I could write. The Adoption Credit is a huge, multi-faceted beast of a tax credit. Here are a few of the key points:
First, the qualifying expenses- these are expenses that could be deemed reasonable in the course of the adoption process including adoption fees, court costs, attorney fees, traveling expenses (including amounts
spent for meals and lodging while away from home), and other expenses directly related to and for which the principal purpose is the legal adoption of an eligible child.
Now, who's an "Eligible Child"? - this is an individual under 18 OR who is physically or mentally incapable of caring for themselves.
If the adoption is of a non-US citizen or resident, the adoption must be finalized in order to claim the credit.
The amount of the credit may be increased if the adoption is of a child who is considered special-needs.
The maximum credit for Tax Year 2009 is $12,150.
Basically, the credit is one that is called a "Non-refundable" credit, which means you can use it to take your income tax liability to zero, but any excess cannot be added to your refund. One of the ways the Adoption Credit is unusual is that it has a carry-over provision. If you don't use it all up the first year, what's left can be carried over to the next year. Additionally, the credit is a straight dollar-for-dollar credit. Most credits are a percentage of the expenses (For example, a Lifetime Learning Credit is 20% of what you paid) but the adoption credit basically gives you the whole thing back.
One other quick note- there are income restrictions for eligibility. Your modified AGI for 2008 was limited to under $214,730 to claim the credit. (As of this post, the 2009 forms were not finalized. Minor inflationary increases are common.)
You cannot claim this credit if you adopt the child of your spouse (your step-child).
Now, having said all this, this is probably one of those credits that have enough little bits and pieces that you're going to want to sit down with a qualified professional to determine your specifics. There are lots of side notes like -  what is considered a special-needs child,  times when you can claim the credit before the adoption is final, or if it is not completed at all, and other strange and unique situations that can come up. Alternatively, you might use the instructions for IRS Form 8839, available on the IRS Website at IRS.GOV (I'm not going to directly link to the form since at this time, all there is is for 2008- use the search function in the upper right corner of the page and look for 8839.) Finally, there are a number of great tax books out there that would be very helpful. I've used both J.K. Lasser and Earnst and Young's books, and find them fairly clear and understandable, even for non-tax people. But, really, you're talking about $12,150 potentially. It's probably worth paying a professional to make sure it's right.

Q) When you buy a home and get the stimulus credit, do you have to wait and file with your tax return or can you file it when your purchase is final?  

You may claim that credit as soon as the ink is dry on that closing paperwork! Here's the deal on this one - they re-extended this credit effective Nov. 6, 2009. The new rules include some changes on how to claim the First Time Homebuyer's Credit (and now, the Replacement portion of that credit) - the biggest one being that you now must include a copy of your settlement statement with the tax return. Now, if you bought your house after that magical date of 11/6/09, you must wait at least another week to ten days from now, and here's why. They had to update the form, and it's not done. (Tentative date Jan 10, 2010 - search using that same link for Form 5405.)
Also new is that the form for the Homebuyer's Credit now cannot be electronically filed, so I like the idea of doing this as an amendment anyway. And note that this money probably isn't coming fast. They are asking for up to 16 weeks to process these right now, and as we go into the tax season, I don't see any hope of that time frame improving. So if YOU qualify - make it happen as soon as you can!

Ok kids, disclosure time!

Any tax advice contained in this site was not intended or written to be used, and cannot be used for the purpose of avoiding penalties that may be imposed by the Internal Revenue Service.
The information on this site is provided for general illustration and instructional purposes and does not create a business or professional services relationship. Any reliance on the information is solely at the user's own risk.
Before making tax or business decisions, please consult a qualified tax professional directly. You may contact Megan M. directly via email at allabunchofmomsense (at) gmail (dot) com.

And a reminder that yep, I'm still taking those tax questions! Now with the caveat that, um, it's tax season, and darn the luck, that guy who pays me totally expects me to do work for him. And kind of a lot of it, at least over the next six weeks. So, be patient with me - if you have a pressing question, feel free to email it to me, otherwise click that cute tax-looking button up at the top right to get to the Anonymous Question box! (Yeah, that button. With the forms, and the broken pencil, and the coffee ring. It's cute, isn't it!?)

And GUESS WHAT!? This is my 99th post! So we're going to get to kick off the new year with a giveaway! Don't forget to check back in!!


  1. 99th Post! That's awesome. Can't wait to see what the giveaway is. Happy New Year!

  2. Thanks so much for the answer! You are AWESOME! PS we call my dad Papaw too! Sorry he couldn't be there this year. :( Happy New Year!