Tax Time Windfall: Family Gets $54,000 Tax Refund
The Wards make about $39,000 per year. You would guess that would make a tax refund such as theirs impossible, right? Not at all, thanks to refundable tax credits.Refundable tax credits are the new darling of the tax world. Traditional tax credits reduce the tax that you owe dollar for dollar until you reach zero tax liability -- your tax refund cannot, with a traditional tax credit, exceed the amount of your withholding. However, refundable tax credits mean that you can reduce your tax liability to zero and then have the entire amount of the additional credit refunded to you. That's a significant tax bonus.
Here's how it worked out for the Wards: Over the past few years, the Wards have adopted five children. With each adoption, the Wards were allowed to deduct their qualifying expenses to adopt the children -- the expenses could include reasonable adoption fees, court costs, attorney fees, traveling expenses and other expenses directly related to the adoption. Those expenses can really add up, as the typical private adoption costs about $30,000.
Parents who adopt special needs children may be able to claim the entire credit even if the expenses don't reach the full amount. That worked out nicely for the Wards since all of the children they adopted were special needs -- one has a serious heart condition requiring surgery, and the remainder participate in regular therapy and special classes for learning disabilities.
For nearly 15 years, the adoption tax credit was nonrefundable, so as the Wards have adopted their children, they simply rolled the excess credit to the next year. That all changed in 2010, when the credit became refundable. That meant the Wards could claim their prior year refund credits all at once during this tax season with the exception of one expired credit.
It's a nice windfall for the Wards, though the expenses associated with parenting the children, including repairs to their home, will soon eat away at their refund check.
Other taxpayers may be receiving a similar benefit this year, though admittedly the number of taxpayers who qualify for the credit is limited. However, other refundable credits are still available for 2010. Examples include the Making Work Pay Credit, the earned income tax credit and the first time homebuyer's credit.
While it's not considered a good idea to rely on tax refunds from year to year (it makes much better sense to adjust your withholding so you receive more in your paycheck each month), an unexpected windfall such as the one received by the Wards is certainly a nice surprise.
The Wards had their tax preparer to thank; they weren't even expecting a refund since they didn't know about the change in the law. Clearly, it pays to stay on top of changes in the Tax Code.
Keep reading WalletPop for the latest news. While we can't promise you a $50,000 refund, we can make sure that you know all you need to know to maximize your own tax savings.