Additional child tax credit

[oceanlovin'ea]

I have a client who is a s corp, only shareholder, had wages of $5500 and net profit from K-1 of 25,933. (I know wages were too low. I've told him for several years. This year he has increased wages)

I was doing a projection of income for him for this year and didn't understand why he didn't get the additional child tax credit. The only thing I can figure is that for earned income the only amount that was considered was the wages.

Should the net earnings from the K-1 also have been used to figure the credit? Just using wages, he doesn't get it, but if the K-1 earnings were included, he would get some credit.

Thanks.

Linda F

[Bird Legs]

Additional Child Credit

Only earned income is considered for this. W-2 income is earned. K-1 income, technically, is earned, but not for this. It is passive.

[oceanlovin'ea]

Increase wages

Then this is a good argument to use to get him to increase his wages and he has agreed to do that already.

Because he has adopted 9 children last year and would have gotten the child tax credit and adoption credit.

Thanks

Linda F

[John of PA]

9 children

My wife and I adoped 4, and it's the best thing we ever did. Sounds like you have a very special client there. In your projections be sure to take a look at AMT, as 9 children will probably trigger the AMT. Too bad your client is not an LLC, and the pass through is all earned income. IF the income was all earned income, the adoption credit would take care of wiping out the regular tax and AMT, then the 9000 refundable child credit can go against any SE tax. I have a couple clients in this scenario.

[oceanlovin'ea]

They don't have much to take as expenses for adoption. They are foster parents and will take siblings into their home. They have adopted 2 brothers, 2 brothers and 2 sisters and another set of 2 brothers and 1 sister. The last set become final in a couple of weeks. But since the children have been placed with them by the state, DCF has paid most of the expenses.

For this family, this is just in the past 3 years. Before that, they adopted her sister's baby at birth. Then the state asked them to take a boy about 8 or 9 years old. They had custody but could never adopt him. When he turned 18, he changed his name to theirs. Then when he was about 15, they were asked if they would take his brother who was about 12 at the time. So they did. He had been moved around so much that they could hardly find school records on him. He could only read at about a first grade level. The mom taught him at home and in 9 months he was reading the Bible fluently. Then the next year they were asked to take the boy's sister. She was almost 16 at the time. They all refer to this couple as their parents.

They have also been the drop off point for numerous other kids with not very responsible parents. Would have the kids for a while and then the parents would want them back. So they became foster parents. This stopped the drop off situation and made it possible for them to give a good home to kids that would never have had the chance to be part of a family.

I have such admiration and respect for them. They are so loving with all their kids.

Linda F

[John of PA]

They get credit anyway

If the adoption is a domestic adoption, which it sounds like it is, they get the 10,000 per child adoption credit, regardless of how much they actually spent. It's foreign adoptions (ex: adopt a child from China) that the credit is limited to the amount spent. Hope this helps, Give the kids a hug for me if you get a chance.

[jainen]

"special needs" children

>>they get the 10,000 per child adoption credit, regardless of how much they actually spent<<

Most adoptions through state agencies are "special needs" children who are difficult to place. The eight-year-old boy was certainly one. These adoptions qualify for the full credit regardless of actual expenses.

[oceanlovin'ea]

Adoption credit

Wow!! They will be very happy to hear that news. As I was reading the definition for special needs children, I realized that all of their adoptions are special needs children, This would be the case because they are sets of siblings and over 5 years old which makes them less likely to be adopted.

So for the adoptions that were final in 2005, I need to amend their return and put the adoption credit on the tax return. Their taxable income was zero but the credit can be carried forward for 5 years which would mean it would need to be on this tax return to count 5 years. Then the 3 adoptions that will go through this month will be a credit on 2006 tax return.

That means that they won't have to pay any taxes for six years altogether, 2005 through 2010.

Thanks for clearing that up for me.

Linda F

[jainen]

And thanks

And thanks to your clients for the difficult task they have taken on, in providing a loving home for these unfortunate children.

[Aviator]

Additional Child Tax Credit

Regardless of the tax issues discussed in this thread, I think the parents of these children are deserving of whatever good things they receive.

There are really some great people out there!

Aviator