Deductions and Credits · Credits

Adoption credits

Two things about this credit reward precision. It is claimed in a year that has nothing to do with when the money was spent, unless the adoption is foreign, in which case the rule flips. And from 2025 part of it is refundable for the first time since the credit was enacted — an amendment that applies to taxable years beginning after 31 December 2024, so it reached back into a filing season that had already begun.

The rule

The credit. A credit equal to the qualified adoption expenses paid or incurred by the taxpayer (IRC § 23(a)(1)), capped at $17,670 of qualified adoption expenses per child for taxable years beginning in 2026 — a per-child aggregate across all years, not an annual cap^TY2026 (IRC § 23(b)(1)). Read the cap carefully: it is an aggregate for all taxable years with respect to the adoption of one child, so a multi-year adoption draws on one allowance, while a second adoption gets its own.

When it is claimed. an expense paid before the year the adoption becomes final is credited in the following taxable year; an expense paid in or after that year is credited when paid — except for a foreign adoption, where nothing is allowed until the adoption is final and all earlier expenses are then treated as paid in that year (IRC § 23(a)(2), (e))^TY2026 The first limb is the one that surprises people — an expense paid two years before the adoption is finalised is credited in the year after it was paid, whether or not anything has been finalised by then. If the adoption never becomes final, the credit already taken for a domestic adoption is not clawed back.

Special needs. $17,670 for taxable years beginning in 2026, deemed paid in the year the adoption becomes final regardless of what was actually spent — the taxpayer is treated as having paid the excess of that amount over the expenses actually paid in that year and all prior years (IRC § 23(a)(3))^TY2026 A child with special needs is one that a State or Indian tribal government has determined cannot or should not be returned to the parents’ home, and for which the same authority has determined that a specific factor or condition makes it unreasonable to expect placement without adoption assistance, and who is a citizen or resident of the United States (IRC § 23(d)(3)(A)–(C)).

Refundability. $5,120 for taxable years beginning in 2026 — the IRC § 23(a)(4) refundable portion added by Pub. L. 119-21 § 70402(a) for taxable years beginning after 31 December 2024, indexed from a $5,000 base under § 23(h)(3)^TY2026 (IRC § 23(a)(4)). The refundable portion is treated as a subpart C credit rather than a subpart A one, which is what takes it outside the § 26(a) tax liability limitation. Everything above that amount remains nonrefundable.

Carryforward. five taxable years after the year the credit arose, on a first-in first-out basis, and only for the non-refundable portion (IRC § 23(c)(1), (2) as amended by Pub. L. 119-21 § 70402(c))^TY2026. Note what Pub. L. 119-21 § 70402(c) did to this subsection: it now carries forward only “the portion of the credit allowable under subsection (a) which is allowed under this subpart”. The refundable portion is paid out and so has nothing to carry; only the nonrefundable excess moves forward, and only for five years.

The income limitation. The credit is reduced ratably over modified adjusted gross income of $265,080 to $305,080 for taxable years beginning in 2026, applied ratably, with adjusted gross income determined without regard to IRC §§ 911, 931 and 933^TY2026 (IRC § 23(b)(2)(A), (B)). The reduction is applied to the credit as already capped by the dollar limitation, and it is a ratio rather than a dollar-for-dollar reduction.

Qualified adoption expenses. Reasonable and necessary adoption fees, court costs, attorney fees and other expenses directly related to and principally for the legal adoption of an eligible child (IRC § 23(d)(1)). Four things are excluded by the same paragraph: expenses incurred in violation of state or federal law, expenses of a surrogate parenting arrangement, expenses of adopting the child of the taxpayer’s spouse, and anything reimbursed under an employer programme or otherwise (IRC § 23(d)(1)(A)–(D)).

Eligible child. An individual under 18, or one physically or mentally incapable of self-care at any age (IRC § 23(d)(2)(A), (B)). The incapacity limb has no age ceiling — an adult with a qualifying incapacity is an eligible child for this section.

Two more denials. No credit for an expense for which a deduction or credit is allowed elsewhere in chapter 1, and no credit to the extent the expense is funded by a federal, state or local programme (IRC § 23(b)(3)(A), (B)).

Filing and identification. Rules similar to § 21(e)(2), (3) and (4) apply, so a married taxpayer must file jointly subject to the separated spouse exception (IRC § 23(f)(1)). The return must carry the child’s name, age and taxpayer identification number if known, though the Secretary may accept other information including identification of the agent assisting with the adoption (IRC § 23(f)(2)(A), (B)).

The employer exclusion alongside it. $17,670 of employer-provided adoption assistance excludable for 2026 under IRC § 137, phasing out over the same modified adjusted gross income range as the credit — a separate benefit that may be used alongside the credit but not on the same expenses^TY2026 The two benefits are not alternatives — a taxpayer may use both, but § 23(d)(1)(D) removes reimbursed expenses from the credit, so they cannot both apply to the same dollar.

Current figures

How it works in practice

Establish the character of the adoption first, because it decides everything else: domestic or foreign, special needs or not, and whether the child is the spouse’s.

Then place each expense in a year. For a domestic adoption, expenses paid before the year of finalisation land in the following year; expenses paid in or after that year land where paid. For a foreign adoption nothing is allowed until finalisation, and then everything earlier is treated as paid in that year. The practical effect is that a foreign adoption bunches into one year and a domestic one can straddle several.

Then apply the per-child cap across all years, not per year. A taxpayer who used part of the allowance two years ago has only the remainder.

Then apply the income limitation, and only then split the result into refundable and nonrefundable parts. The refundable amount is paid regardless of liability; the rest reduces tax and any excess carries forward for five years.

For a special needs adoption the arithmetic changes shape entirely: the statutory amount is deemed paid in the year of finalisation, reduced by expenses actually paid in that year and all prior years, so the credit reaches the full figure whether the taxpayer spent nothing or spent a great deal — as long as the determination by a State or tribal government exists.

How this has changed

Pub. L. 119-21 made two separate amendments to § 23, and they carry different effective dates.

Section 70402 added § 23(a)(4), making part of the credit refundable for the first time, and amended § 23(h) to index that new amount from a later base year with a later reference year — § 23(h)(3) substitutes 2025 for 2002 and calendar year 2024 for calendar year 2001, so the refundable figure moves on its own schedule rather than with the rest of the section. Section 70402(c) then narrowed the carryforward in § 23(c)(1) to the portion allowed under subpart A. All of § 70402 applies to taxable years beginning after 31 December 2024, meaning it reached the 2025 return.

Section 70403 inserted “or Indian tribal government” into both determinations in § 23(d)(3)(A) and (B), so a tribal determination now establishes special needs on the same footing as a State determination. Its effective date is set separately by § 70403(b). Before this amendment, a child placed through a tribal child welfare system needed a State determination that might never be made.

The 2026 figures themselves come from Rev. Proc. 2025-32 § 3.04, with the parallel § 137 amounts at § 4.18 of the same document. Note that the § 23(b)(1) dollar limitation and the § 23(a)(3) special needs amount are the same number, and that the § 137 exclusion is that number again — three provisions tracking one figure, which is why an error in one place tends to propagate.

Exam focus

The timing rule is the most likely question, and it is worth being able to state both directions without hesitation. Expect a fact pattern with expenses over two or three years and a finalisation date, asking which year carries what.

Expect a definitional question on who is not eligible, where the spouse’s child is the answer. Know that surrogacy is excluded, that an incapacitated adult is an eligible child, and that special needs is a determination by a State or tribal government rather than a description of the child.

Know that the credit is now partly refundable, that only the nonrefundable part carries forward, and that the carryforward runs five years first in first out. Do not answer a 2026 question with a pre-2025 figure — the credit amount moves every year and the refundable portion is new.

Check yourself

1. A taxpayer paid $9,000 of qualified adoption expenses in 2025 for a domestic adoption that became final in 2027. On which return is the credit claimed?

Answer: The 2026 return. IRC § 23(a)(2)(A) allows a credit for an expense paid before the year the adoption becomes final in the taxable year following the year of payment. Finalisation in 2027 does not delay it, and no finalisation at all would not undo it.

2. The same facts, but the child is not a citizen or resident of the United States. When is the credit claimed?

Answer: On the 2027 return. IRC § 23(e)(1) allows nothing for a foreign adoption unless it becomes final, and § 23(e)(2) then treats every expense paid earlier as paid in the year of finalisation.

3. A couple adopt a child with special needs and pay $1,900 of qualified adoption expenses. Their income is well below the phase-out. Is the credit $1,900?

Answer: No. IRC § 23(a)(3) treats them as having paid the excess of the statutory special needs amount over the expenses actually paid in that year and all prior years, so the credit reaches the full statutory figure for 2026 regardless of the $1,900.

4. A taxpayer’s nonrefundable adoption credit exceeds their tax liability by $3,000. What happens to the excess?

Answer: It carries forward under IRC § 23(c)(1) and is added to the credit for the succeeding year, for up to five taxable years after the year the credit arose, used first in first out under § 23(c)(2). The refundable portion under § 23(a)(4) is not part of this and is paid out directly.

5. An employer reimburses $4,000 of an employee’s adoption expenses under a qualifying programme, and the employee paid $9,000 in total. What are the qualified adoption expenses for the credit?

Answer: $5,000. IRC § 23(d)(1)(D) excludes expenses reimbursed under an employer programme or otherwise. The reimbursed $4,000 may instead be excluded from gross income under § 137, subject to that section’s own limit and phase-out, so the taxpayer gets both benefits but not on the same dollars.