Effective for the 2025 tax year,the Adoption Tax Credit is now partially refundable up to $5,000 even if you do not owe federal income tax, and you may carry forward any unused credit for up to five years. This change marks a major victory for families growing through adoption, as the credit becomes partially refundable for the first time since 2011—offering meaningful financial support when it’s needed most.
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The U.S. tax code presently allows adoptive families a tax related benefit for all qualifying costs and fees incurred in pursuing an adoption. The IRS allows a broad definition of allowed costs and fees such that in most cases, all fees and costs paid to an adoption agency, an attorney, costs paid to or for a birth parent, medical costs, and related services, are most often allowed and included in the calculation of the tax credit amount. A tax credit is deducted from the bottom-line tax that is owed, so for most families, it means getting cash back in the form of a tax refund on a dollar-for-dollar basis of the amount allowed. The dollar amount allowed under this law changes each year and it is currently set at $17,280 per child for 2025 (increased from $16,810 in 2024). The tax credit begins to phase out for those families whose modified adjusted gross income for the applicable tax year is more than $259,190 and is completely phased out for families with modified adjusted gross income of $299,190 or more (these income numbers are increasing each year as well).
The adoption of a “special needs” child qualifies for the full tax credit amount for each child without having to show the payment of any costs or expenses. This tax credit is most often allowed in the year the adoption is finalized. See the examples below for additional information regarding the Adoption Tax Credit in 2025. Check with your accountant or call our office for more details regarding the specific application of this tax benefit in your case.
Tax law changes include some important changes to the federal Adoption Tax Credit in recent years.
- A qualifying adoption is eligible for the adoption tax credit amount of $17,280 per child in 2025.
- The adoption tax credit is “refundable” up to $5,000. Any unused amount may be “carried over” up to five years and may be applied to reduce your future tax liability.
- Some children adopted through state foster care systems are deemed to be a child with “special needs” and therefore, the full $17,280 per child tax credit is permissible – even where the state subsidized the adoption – if all 3 of the following statements are true:
- The child was a citizen or resident of the United States at the time the adoption process began.
- A state (including the District of Columbia) has determined that the child cannot or should not be returned to his or her parents’ home.
- The state has determined that the child will not be adopted unless assistance is provided to the adoptive parents. Factors used by states to make this determination include:
- The child’s ethnic background and age;
- Whether the child is a member of a minority or sibling group; or
- Whether the child has a medical condition or a physical, mental, or emotional handicap.
- If a child was not adopted from state foster care and does not receive a state adoption subsidy, it is commonly believed that as the state has not determined that the child has “special needs”, and the adoptive family is not likely able to take the full limit amount of the adoption tax credit. Rather, the adoptive family can take the adoption tax credit for those documented actual expenses paid for the cost of the adoption.
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