Overview of the Adoption Credit: The adoption credit is designed to assist adoptive families by offsetting some of the costs associated with adoption. In 2025, the adoption credit is capped at $17,280 for qualified expenses per adoption (not per return). A pivotal update this year is that part of the credit, up to $5,000, is refundable. This new OBBBA feature allows adoptive families to receive a cash refund if the credit exceeds their total tax liability.
Eligibility and Definitions
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Eligible Child: For the purposes of the adoption credit, an eligible child is defined as any individual under the age of 18 or a person who is physically or mentally incapable of self-care.
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Special Needs Child: A special needs child is typically difficult to place for adoption, often due to factors like age, racial or ethnic background, the presence of a medical condition or disability, or being part of a sibling group that should be adopted together. Often, state governments determine if a child is special needs, but starting after 2024, Indian tribal governments also have the authority to make such determinations, ensuring greater inclusivity.
Important note about the credit for a special needs child: Generally, the adoption credit can’t exceed the qualified adoption expenses paid by the taxpayer for an eligible child, but when a special needs child is adopted, the taxpayer is treated as having incurred expenses equal to the year’s maximum credit amount, even when the taxpayer’s actual expenses are less.
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Qualified Adoption Expenses: These are reasonable and necessary expenses directly related to the legal adoption of an eligible child. Eligible expenses include adoption fees, court costs, attorney fees, and travel expenses. Not eligible are the expenses for carrying out a surrogate parent arrangement, adopting a child of the taxpayer's spouse, and those paid for by any federal, state or local program.
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Refundable vs. Non-Refundable Credit: The new refundable portion of the credit is an exciting update, enabling families to benefit even if their tax liability is lower than the credit. Meanwhile, the non-refundable portion can be carried forward for up to five years, providing additional opportunities for families to utilize the credit over time.
- Higher Income Credit Phase-Outs: In 2025, the credit begins to phase out for taxpayers with a modified adjusted gross income (AGI) over $259,190, fully phasing out at an AGI of $299,190. This means families with incomes between these two amounts will see a reduced credit, and no credit at all if the top of the range is exceeded. The phaseout thresholds and caps are the same for all filing statuses, and are inflation-adjusted each year. Credits that are carried over are not subject to the phaseout rules in the carryover year.