Is the Adoption Tax Credit Refundable? Key Facts to Know
Understand how the adoption tax credit works, its refundability rules, and how to maximize its benefits based on your financial situation.
Adopting a child can be expensive, but the Adoption Tax Credit helps offset some of the costs by reducing a taxpayer’s liability for qualified adoption expenses. A common question is whether this credit is refundable, meaning adoptive parents could receive money back even if they owe little or no taxes.
Refundability Criteria
The Adoption Tax Credit is nonrefundable, meaning it can reduce federal income tax liability to zero but does not result in a refund if the credit exceeds the amount owed. This limitation affects lower-income families or those with minimal tax liability, as they may not be able to use the full credit in the year it is claimed. The credit applies only to federal income taxes and does not offset self-employment taxes or penalties.
For 2024, the maximum credit is $16,810 per child, adjusted annually for inflation. The amount a taxpayer can claim depends on their tax liability for the year. If the credit exceeds the tax owed, the unused portion does not generate a refund but can be carried forward for up to five years. This differs from refundable credits like the Earned Income Tax Credit (EITC), which provides a direct payment even when no taxes are owed.
Income limits apply. The credit phases out for taxpayers with a modified adjusted gross income (MAGI) above $252,150 and is unavailable at $292,150.
Eligible Expenses
Only certain costs qualify for the Adoption Tax Credit. Covered expenses must be directly related to the legal adoption of an eligible child and must be reasonable and necessary. These include adoption agency fees, court costs, attorney fees, and travel expenses such as airfare, lodging, and meals incurred while finalizing the adoption.
Domestic and international adoptions both qualify, but the timing for claiming expenses differs. For domestic adoptions, eligible costs can be claimed in the year after they are paid, even if the adoption is not finalized. For international adoptions, expenses can only be claimed once the adoption is completed.
Certain costs do not qualify, including expenses reimbursed by an employer, government agency, or other entity. Payments for a surrogate parenting arrangement or for adopting a spouse’s child are also ineligible. Keeping detailed records and receipts is essential to avoid issues with the IRS.
Carryforward Provisions
Families who cannot use the full Adoption Tax Credit in a single year can carry forward the unused portion for up to five additional years. If the credit exceeds a taxpayer’s liability in the year it is claimed, the remaining amount can be applied to future tax years until it is fully used or the carryforward period expires.
This feature benefits families whose tax liability fluctuates. For example, if a taxpayer claims the credit in 2024 but does not owe enough in taxes to use the full amount, they can apply the remaining credit to their 2025 tax return. If any credit remains, they can continue carrying it forward until 2029. Any balance left after that is forfeited.
Strategic tax planning can help maximize the credit’s value. Those expecting an increase in income or tax liability in future years may benefit from spreading the credit across multiple filings.
Claiming the Credit
To claim the Adoption Tax Credit, taxpayers must complete IRS Form 8839, Qualified Adoption Expenses, and attach it to their federal tax return. This form requires details such as the total amount of qualified expenses, the year they were paid, and whether the adoption was finalized. Accuracy is essential, as errors or omissions can lead to processing delays or IRS inquiries.
Proper documentation is particularly important if the IRS requests additional verification. The agency may ask for proof of expenses, a copy of the adoption decree, or evidence of a failed adoption attempt if claiming expenses for an adoption that was not finalized. Maintaining organized records for at least three years after claiming the credit can help taxpayers respond quickly to any audit-related inquiries.
Coordination with Other Credits
The Adoption Tax Credit interacts with other tax benefits, and understanding these relationships can help families optimize their overall tax situation. Some taxpayers may also qualify for employer-provided adoption assistance, the Child Tax Credit, or the Earned Income Tax Credit (EITC), but each has different eligibility rules and limitations.
Employer-provided adoption assistance allows workers to exclude certain adoption-related reimbursements from their taxable income. However, the same expenses cannot be used to claim both the exclusion and the Adoption Tax Credit. If an employer reimburses $5,000 in adoption costs, that amount must be subtracted from the total eligible expenses before calculating the credit.
Families may also qualify for the Child Tax Credit after finalizing an adoption. While the Adoption Tax Credit helps offset upfront costs, the Child Tax Credit provides ongoing tax relief for parents raising a child. Unlike the adoption credit, the Child Tax Credit is partially refundable, meaning it can result in a refund even if no taxes are owed. Families should consider how these credits work together to maximize their tax savings over multiple years.