Major Changes to the Adoption Tax Credit

What the Adoption Tax Credit Is

The Adoption Tax Credit is a federal tax benefit designed to help adoptive families offset the often high costs of adoption (including domestic, international, and foster care adoptions). The tax rules that govern how the credit is claimed and the amount of the credit are determined by the year the adoption became final. Traditionally non-refundable, the credit reduces federal tax owed, dollar-for-dollar, based on qualified adoption expenses. But for adoptions finalized in 2025 and later the credit becomes partially refundable so it will benefit families even when they have little to no tax liability.  (IRS)

Qualified expenses can include:

• Adoption fees (including home study fees, agency fees and application fees)
• Court costs and legal fees
• Travel expenses (meals/lodging) related to adoption
• Other directly related costs linked to the legal adoption process

Note that qualified adoption expenses do not include living expenses paid for expectant parents, even if allowed under state law.

When Do Families Claim the Adoption Tax Credit?

Timing of claiming the depends on the type of adoption:

• Domestic Adoption (U.S.): Families may claim qualified expenses in the year after the expenses are paid, even if the adoption is not yet finalized. If the adoption is later finalized, additional expenses can be claimed in the year of finalization. Families can also claim the credit even if they never finalized an adoption (i.e. if they began an adoption process but never completed an adoption, or had a disrupted adoption).

• International Adoption: Expenses cannot be claimed until the adoption is finalized, and then all qualified expenses are claimed in the year of finalization.

• Adoptions of Children with Special Needs (U.S.): If a child is determined to have special needs, families may claim the full credit amount in the year the adoption becomes final, even if out-of-pocket expenses were minimal.

Families claim the credit by filing Form 8839, Qualified Adoption Expenses, with their federal tax return.

Key Changes Starting in 2025

1. Increased Credit Amount

For the 2025 tax year (returns filed in 2026), the maximum credit per eligible child is: $17,280 — an inflation-adjusted increase from prior years. Note that if you adopted twins, you are eligible for that credit per child.

For the 2026 tax year (filed in 2027), the credit will be $17,670.

2. Partial Refundability (Biggest Change)

One of the most significant changes effective for adoptions finalized in 2025 and later is that the credit becomes partially refundable:

• Up to $5,000 per eligible child may be refundable — meaning a taxpayer can receive that portion as a refund even if they owe little or no federal tax, and $5,000 per child is refundable if adopting twins or siblings.
• The refundable portion is indexed for inflation in future years.
• The non-refundable portion still applies — first to reduce tax owed — and any unused amount may be carried forward up to five years (but carryforwards don’t create additional refundability).

3. Expanded Eligibility Rules

While many eligibility rules remain consistent, key points under the updated law include:

• A “qualifying child” is under age 18 or physically/mentally incapable of self-care.
• Special needs adoptions are still eligible, and now Indian tribal governments have equal authority with states to designate special needs status for the credit. (IRS)
• Adopting your spouse’s child does not qualify for the credit.

4. Income Phase-Outs Still Apply

The credit amount is reduced (phased out) as Modified Adjusted Gross Income (MAGI) rises above set thresholds:

• For 2025, the phase-out begins around $259,190 and ends around $299,190 (indexed annually). (IRS)

Families with incomes above the upper threshold generally cannot claim the credit.

Practical Impacts for Families

🔹 Better access for lower-income families
Because part of the credit is now refundable, families who owe little or no tax — such as those with very young children or early in their careers — can benefit more directly. (IRS)

🔹 Carryforward remains important
If your qualified adoption expenses exceed both the refundable and non-refundable credit amounts in a given year, unused non-refundable credit can be applied against taxes over the next five years.

🔹 Filing practical steps
To claim the credit, taxpayers must complete IRS Form 8839, Qualified Adoption Expenses, and attach it to their federal return. (IRS).

We always recommend to our Purl Families that they hire or speak with an accountant before claiming adoption expenses.  Our recommendation for an accountant who is extremely knowledgeable in this area is 1st Choice Tax Services, Inc. based in Tucson, Arizona, but serve families anywhere in the United States. They offer a $100 discount per year on each year of tax preparation for adoptive and foster families and for families without earned income and no taxable income, they will file their tax return to claim the $5,000 per child refund for a discounted fee of $250.

Looking Ahead: 2026 and Beyond

• Inflation adjustments will continue to change the credit cap annually.
• The refundable portion will remain indexed and adjust over time.
• Future tax legislation could further tweak eligibility or refundability, though as of now the 2025 changes represent the most significant update to the tax credit in decades.

Bottom Line

The Adoption Tax Credit in 2025 and beyond represents a significant improvement in affordability and accessibility for adoptive families — particularly through the introduction of partial refundability and annual inflation-adjusted increases — while retaining core eligibility rules and income phase-outs.

Families who adopted or pay adoption expenses in 2025 and beyond should carefully plan their tax filings to capture these benefits and work with a tax professional as needed.