How the Adoption Credit Can Ease Your Path to Parenthood
Are you in the process of or thinking about adopting? The tax code includes an adoption credit which is a significant benefit available to taxpayers who adopt a child, providing financial relief for eligible expenses. For the 2025 tax year, there have been notable enhancements to the adoption credit.
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 feature allows adoptive families to receive a cash refund if the credit exceeds their total tax liability.
Eligibility and Definitions
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.
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.
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.
Financial Considerations
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.
Specific Circumstances and Rules
Failed Domestic Adoptions: If a domestic adoption attempt fails, adoptive parents may still qualify for the adoption credit for expenses incurred, provided these expenses are associated with the attempt to adopt an eligible child. This provision recognizes the significant costs and emotional investment involved in such situations.
Special Rules for Foreign Adoptions: When adopting a child from a foreign country, specific rules apply. The adoption must be finalized for the adoptive parents to claim the credit. Additionally, expenses can be claimed either in the tax year the adoption becomes final or in the year the expenses are paid, whichever comes later. An important aspect of foreign adoptions is obtaining an IR-Visa, which facilitates the entry of the adopted child into the U.S.
Readoption Expenses: Some families choose or are required to readopt a child in their home state after adopting abroad. These expenses are also considered qualified, providing further financial relief to adoptive families facing complex legal processes.
Employer Reimbursement and its Impact: If an employer reimburses an employee for adoption expenses, this benefits the employee but can affect the tax treatment of the adoption credit. Employer-reimbursed expenses must be subtracted from the total adoption expenses when calculating the eligible amount for the credit.
Adoption Process Essentials
Obtaining an Adoptive Child ID Number: Each adopted child must have a taxpayer identification number (TIN), such as a Social Security Number (SSN) or an Adoption Taxpayer Identification Number (ATIN) if an SSN isn't immediately available. This is crucial for both claiming the adoption credit and for tax-related documentation.
Filing Requirements for Married Taxpayers: Married couples generally must file jointly to claim the adoption credit, ensuring that both spouses' incomes and expenses are considered in determining eligibility and credit amounts. A notable exception exists if the taxpayers are considered unmarried by being legally separated or living apart for the last six months of the year.
Strategic Financial Planning: The adoption credit offers a valuable tool for financial planning in the adoption process. Families considering adoption should analyze how the credit fits into their broader financial picture, considering aspects like income levels, expected adoption-related expenses, and their potential tax liability.
Tax Benefits Beyond the Adoption Credit: Adoptive parents may be eligible for several tax benefits beyond the adoption credit. These benefits can help alleviate some of the financial burdens associated with adopting a child. Here are some notable tax benefits that may apply to adoptive parents:
Adoption Assistance Programs: Many employers offer adoption assistance programs as part of their employee benefits. Under these programs, employers may reimburse employees for qualified adoption expenses. Employees can exclude these reimbursements from their taxable income up to a certain limit $17,280 for 2025).
Child Tax Credit: Adopted children qualify as dependents on a parent's tax return, and for a dependent child under age 17 the parents are allowed to claim a Child Tax Credit. This $2,200 credit provides additional financial relief and may significantly reduce tax liabilities.
Child and Dependent Care Credit: If you require childcare to work or look for work, you may qualify for a credit for a percentage of daycare expenses incurred, which can be beneficial as you transition your adopted child into your household. The credit applies only if the child is under age 13.
Earned Income Tax Credit (EITC): Adopted children can be qualifying children for the Earned Income Tax Credit, a benefit for low- to moderate-income earners. The EITC can significantly reduce tax owed and potentially result in a refund.
Medical Expense Deductions: Any unreimbursed medical expenses related to the adoption that exceed 7.5 % of a taxpayer's adjusted gross income may be deductible. This includes costs related to the medical care of the adopted child and any health assessments required.
State Adoption Tax Credits: Some states offer additional adoption tax credits or deductions, which can vary significantly depending on state legislation.
Accessible Source of Funds: For many individuals, retirement accounts such as 401(k)s or IRAs constitute one of the larger pools of savings. This makes them an attractive option for funding large, upfront costs associated with adoption. The U.S. tax code accommodates adoptive parents by waiving the typical 10% early withdrawal penalty for up to $5,000 withdrawn from the plan during the 1-year period after the legal adoption is finalized.
Each of these benefits comes with specific eligibility criteria and limitations. Adoptive parents should review the IRS guidelines or consult with a tax professional to understand how to optimize these benefits in the context of their overall financial situation.
Conclusion: With the changes for the 2025 and future tax years, the adoption credit becomes even more beneficial, particularly with the introduction of a refundable portion. Understanding the nuances of eligibility requirements, phase-out thresholds, and specific rules regarding failed, domestic, and foreign adoptions is essential. By carefully planning and coordinating with this office, adoptive families can maximize the benefits of the adoption credit, alleviating some of the financial pressures of growing their families through adoption.
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