Is the Adoption Credit Refundable?

Adopting a child brings joy, but the financial aspects can be daunting. Recognizing these significant costs, the federal government offers a tax benefit known as the Adoption Credit. This credit is designed to help offset various expenses incurred during the adoption journey, providing financial relief for adoptive parents. Understanding this credit helps families navigate adoption and financial planning.

Understanding the Adoption Credit

The Adoption Credit is a federal tax benefit available to individuals who adopt an eligible child. It applies to a broad range of adoption types, including domestic adoptions, international adoptions, and adoptions through public foster care systems. The credit is calculated on a per-child basis, meaning families adopting multiple children can claim the credit for each child.

To be considered an eligible child for this credit, the child must be under 18 years old. If the adopted individual is 18 or older, they must be physically or mentally incapable of self-care. An exception exists for adoptions of a spouse’s child, which do not qualify for the credit. For the 2024 tax year, the maximum credit amount available is $16,810 per adopted child. This maximum amount is subject to annual adjustments for inflation, with the 2025 tax year seeing an increase to $17,280.

Qualified adoption expenses encompass a variety of costs directly related to the legal adoption process. These include adoption fees charged by agencies, court costs, and attorney fees. Travel expenses, such as lodging and meals incurred while away from home during the adoption process, also qualify. Re-adoption expenses related to the intercountry adoption of a child can be included. However, expenses for which an employer has provided reimbursement or those covered by federal or state programs do not qualify for the credit, nor do expenses from surrogate parenting arrangements.

How Nonrefundable Credits Work

The Adoption Credit is a nonrefundable tax credit. This means it can reduce a taxpayer’s federal income tax liability to zero, but it cannot generate a refund beyond the amount of tax owed. For example, if a taxpayer qualifies for a $10,000 credit but only owes $7,000 in taxes, the credit will eliminate the $7,000 tax liability, but the remaining $3,000 of the credit will not be issued as a cash refund.

This characteristic distinguishes nonrefundable credits from refundable credits, which can result in a direct payment to the taxpayer even if no tax is owed. The Adoption Credit includes a carryforward provision. If a taxpayer cannot use the entire credit amount in the year it is claimed because their tax liability is less than the credit, any unused portion can be carried forward.

This unused credit can be applied to reduce tax liability in up to five subsequent tax years. For instance, if a taxpayer has an unused credit of $3,000 in 2024, they can apply this amount to their tax liability in 2025, 2026, and so on, until the credit is fully utilized or the five-year carryforward period expires. For adoptions finalized in 2025, the Adoption Credit may be partially refundable, allowing for a refund up to $5,000 even if it exceeds tax liability.

Claiming the Adoption Credit

Claiming the Adoption Credit involves specific steps for IRS reporting. Taxpayers use Form 8839, “Qualified Adoption Expenses,” to calculate the eligible credit amount. This form requires detailed information about the adopted child and the qualified expenses incurred. After completing Form 8839, the calculated credit amount is reported on the taxpayer’s main federal income tax return, such as Form 1040.

Thorough documentation is important when claiming this credit. Taxpayers should keep meticulous records of all qualified adoption expenses, including receipts, invoices, and contracts from adoption agencies or attorneys. Proof of the adoption itself, such as a final judgment of adoption, should also be retained. For adoptions of children with special needs, documentation like the state’s adoption assistance agreement, which determines the child’s special needs status, is important. These records substantiate the claim in the event of an IRS inquiry or audit.

The timing for claiming the credit depends on the type of adoption. For domestic adoptions that do not involve a child with special needs, if qualified expenses are paid before the adoption is finalized, the credit for those expenses can be claimed in the tax year following the year of payment. If expenses are paid in the year the adoption becomes final or later, they are claimed in the year of payment. In contrast, for foreign adoptions and adoptions of children with special needs, all eligible expenses, regardless of when they were paid, are claimed in the tax year the adoption becomes final.