Hi again @meehir007, thanks for your follow-up questions.
I'd like to explain about the withholding. Whether you change your tax withholding to $0 or increase it to $1 million, it does not impact how much income taxes you and your wife are assessed when it comes time to filing your return. The withholding is just a mechanism by which to pay the IRS all year long. Increasing it or decreasing just changes the amount you'll either end up owing or being owed. So if you paid in $20k in federal withholding from your paychecks all year, and your tax liability was $25k, you are going to owe $5k in income taxes. If you increased your withholding and paid in $26k all year, your tax liability is still $25k, and now you'll be owed a refund of $1k.
Let's say that you finalize the adoption in 2024. So the total qualified adoption expenses you'll be able to use on the 2024 return will be $12k. Let's say that your tax liability before considering the credit was the $25k I mentioned above, and that you paid in $26k of withholding all year. Your refund would then be $13k. Your total tax was always $25k; your total payments and credits equal $38k ($26k in withholding plus the $12k adoption credit). The difference is $13k. You don't come out ahead by giving the IRS more money than they are owed all year long. You may have heard about people giving an interest-free loan to the IRS via their tax withholdings. This scenario is what they are talking about. 🙂
If you want to use the credit up in one or two years, then you just need to make sure that your tax liability is enough to absorb the credit. One way you could increase your tax liability would be to do a Roth conversion. Or if you normally contribute to a traditional IRA, consider switching it up and contribute to a Roth IRA instead.
Here's what the IRS has to say about Qualified Adoption Expenses (reference this link: Instructions for Form 8839 (2023):
Qualified adoption expenses are reasonable and necessary expenses directly related to, and for the principal purpose of, the legal adoption of an eligible child.
Qualified adoption expenses include:
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Adoption fees,
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Attorney fees,
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Court costs,
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Travel expenses (including meals and lodging) while away from home, and
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Re-adoption expenses relating to the adoption of a foreign child.
Qualified adoption expenses don't include expenses:
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For which you received funds under any state, local, or federal program;
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That violate state or federal law;
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For carrying out a surrogate parenting arrangement;
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For the adoption of your spouse's child;
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Reimbursed by your employer or otherwise; or
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Allowed as a credit or deduction under any other provision of federal income tax law.
All of the adoption expenses that you laid out would seem to be reasonable and necessary in the eyes of this CPA. I hope this helps!
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