Be advised.... The author of this page is not an Accountant.
The below is information that was posted on an Adoption Fundraising Message Board. Please do not contact me in regards to this information. The IRS has an information packet* available for download concerning the Adoption Tax Credit. You may also wish to contact your family Tax Accountant or Advisor.
The tax credit is, like has been said, a credit - a dollar-for-dollar reduction in your tax liability. Basically, if you look at your last year's tax return, take your total tax, before subtracting out withholding or estimated payments, and this is what will be reduced by the tax credit.
If you are in a refund position without the credit, you will get an additional refund, up to the $10,000 if you are married (which for 2004 was over $11,000 due to inflation). However, keep in mind that this is limited to your total tax. If your total tax for the year was only $7,000, your refund is limited to $7,000. But you can carry the credit forward to future years, if you need to. So, for example, if you have $7,000 in tax in 2002, and $7,000 in tax in 2003, you can use $7,000 of your credit in 2002, and the remaining in 2003.
If you are not in a refund, the amount of cash that you will actually receive will most likely be less than the credit amount, since some of the credit will go to cover what your tax liability would have been without the credit. Even though I know it's not the same, economically you'd be in the same position, since you wouldn't have to write a check to Uncle Sam.
Hopefully that helps. If any of you have specific questions, the IRS has a great publication, or you can always call the IRS hotline to get general tax questions answered (they will not ask for your social security number), or you can feel free to email me at my personal email address and I'll try to help you with whatever!
I know the tax code is ridiculous, and sometimes hard to read and interpret. And that's the last thing us adopting parents need to deal with!! Good luck!!
-JB