Financial Benefits of Adopting a Child

The costs associated with adopting a child can be substantial, but prospective parents have access to numerous financial resources. These support systems are designed to alleviate some of the monetary pressures and make the process more accessible. Understanding the available tax credits, employer benefits, and state programs is a practical step in preparing to welcome a new child.

Understanding the Federal Adoption Tax Credit

The federal government provides a tax credit to help offset the cost of adopting a child. For the 2025 tax year, the maximum credit is $17,280 per eligible child, an amount adjusted annually for inflation. This is a nonrefundable credit, which means it can reduce your federal income tax liability to zero, but you will not receive any portion of it back as a refund. Any credit amount not used in the first year can be carried forward for up to five subsequent years.

Eligibility for the full credit is subject to income limitations. For 2025, the credit begins to phase out for taxpayers with a modified adjusted gross income (MAGI) between $259,190 and $299,190. If your MAGI exceeds $299,190, you are not eligible to claim the credit.

The credit is calculated based on “Qualified Adoption Expenses.” These are reasonable and necessary costs directly related to the legal adoption of an eligible child, such as adoption agency fees, court costs, attorney fees, and travel expenses. Expenses for adopting your spouse’s child or costs from a surrogate parenting arrangement do not qualify.

The timing for claiming these expenses depends on the type of adoption. For a domestic U.S. adoption that is not yet final, you can claim qualified expenses paid in a given year on the following year’s tax return. Once the adoption is finalized, all expenses from that year and any prior years are claimed on the tax return for the year the adoption becomes final. For foreign adoptions, expenses can only be claimed in the year the adoption becomes final.

A provision exists for families adopting a child with special needs from the U.S. foster care system. If a state determines a child has special needs, the adoptive parents may claim the maximum credit amount for the year the adoption is finalized, regardless of their actual expenses.

How to Claim the Adoption Tax Credit

Claiming the credit requires specific documentation and tax forms. First, you must gather all required records, which include:

• The final adoption decree or order
• A home study completed by an authorized agency
• Detailed receipts or proof of payment for every qualified expense
• The state-issued adoption assistance agreement, for the adoption of a child with special needs

The next step is completing IRS Form 8839, Qualified Adoption Expenses. This form is used to calculate the adoption credit and any related employer-provided benefits. You can download the current version of Form 8839 and its instructions from the IRS website.

On Form 8839, you will provide information about the adopted child and your qualified expenses. The form guides you in applying income limitation rules to determine your allowable credit amount and has separate parts for reporting employer benefits.

After completing Form 8839, attach it to your Form 1040 federal income tax return. The calculated credit amount is then transferred to Schedule 3, “Additional Credits and Payments,” which accompanies your Form 1040.

Employer-Provided Adoption Benefits

Many prospective parents can find financial support directly from their workplace, as a growing number of companies offer adoption assistance programs. These programs most commonly provide direct financial reimbursement for qualified adoption expenses. Another form of support is paid or unpaid leave, similar to maternity or paternity leave, allowing parents time to bond with their new child.

To find out if your employer offers these benefits, consult your company’s employee handbook or contact your Human Resources department. They can provide specific details about the program’s eligibility requirements, coverage limits, and application process.

A feature of employer-provided adoption assistance is its favorable tax treatment. Under federal law, amounts paid by an employer for qualified adoption expenses through a formal program are often excludable from the employee’s gross income. For 2025, this exclusion is capped at $17,280 per child. You cannot use the same expense for both the income exclusion and the adoption tax credit. This rule prevents “double-dipping,” ensuring that each dollar of an expense is only used for one tax benefit.

State Adoption Assistance Programs

For families adopting children from the public foster care system, state-level programs offer financial support. This assistance is provided through a legally binding “adoption assistance agreement” or “adoption subsidy” between the adoptive parents and the state’s child welfare agency. These agreements are designed to help families meet the needs of children from state custody.

The most common form of support is an ongoing monthly maintenance payment, which is negotiated based on the child’s needs and the family’s circumstances. Many agreements also ensure the child remains eligible for Medicaid coverage until age 18 or 21. States may also offer a one-time reimbursement for non-recurring adoption costs, such as legal fees.

Eligibility for these programs is tied to the state’s definition of a “child with special needs.” This term is broad and does not exclusively refer to children with physical or mental disabilities. A child may be classified as having special needs based on various factors, including:

• Their age, particularly for older children
• Being part of a sibling group adopted together
• Their ethnic or racial background
• A history of abuse or neglect

The purpose of these state subsidies is to remove financial barriers that might otherwise prevent a child in foster care from finding a permanent family.