What Is The Federal Adoption Credit & What’s Changing?
The federal adoption credit, as provided under the Internal Revenue Code (IRC) Section 23, allows taxpayers to claim a credit for qualified adoption expenses paid or incurred in the adoption of an eligible child. The One Big Beautiful Bill Act (OBBBA), enacted in 2025, made several significant enhancements and modifications to this credit, effective for tax years beginning after December 31, 2024. Keep reading for a summary of the adoption credit and the key changes introduced by the OBBBA.
Pre-OBBBA Structure & Limits
The adoption tax credit covers qualified expenses such as legal fees and court costs, excluding costs for adopting a spouse’s child or surrogacy. For 2025, the maximum credit is $17,280 per eligible child (18 years old or younger or unable to care for themselves), with phase-out beginning at a modified adjusted gross income (MAGI) of $259,190. Special needs adoptions qualify for the full credit regardless of actual expenses, and any unused nonrefundable credit can be carried forward for up to five years.
Major Federal Adoption Credit Enhancements Introduced By OBBBA
One of the most impactful changes brought by the OBBBA to the federal adoption credit is the introduction of a refundable component. These updates are designed to make the credit more accessible and beneficial for families, especially those who might not owe federal income tax. The following key points outline how the refundable and nonrefundable portions of the credit now work:
- Up to $5,000 of the adoption credit is now refundable. This means that even if a taxpayer has no tax liability, they can receive up to $5,000 as a refund for qualified adoption expenses. This refundable portion is indexed for inflation annually.
- Any remaining credit above the refundable amount remains nonrefundable and subject to the five-year carry-forward rule. The refundable portion cannot be carried forward.
Recognition Of Indian Tribal Government Determinations
Another important update under the OBBBA expands the scope of who can determine whether a child is considered to have special needs for the purposes of the adoption credit. Previously, only state determinations were recognized. Now, the law reflects greater inclusivity for adopting families and tribal communities:
OBBBA amends IRC Section 23(d)(3) to recognize determinations by Indian tribal governments, in addition to states, for purposes of establishing that a child has special needs. This allows adoptions finalized under the authority of Indian tribal governments to qualify for the special needs credit.
Claiming The Adoption Credit
To claim the adoption credit, taxpayers must provide proper documentation (e.g., adoption decrees or special needs determinations), file jointly if married, and include the child’s name, age, and taxpayer identification number (TIN). Expenses reimbursed or amounts claimed elsewhere cannot be used for the credit.
The OBBBA made the adoption credit more generous and accessible by introducing partial refundability, expanding recognition of special needs determinations to Indian tribal governments, and ensuring all key dollar amounts are adjusted for inflation. These changes are designed to provide greater financial support to families adopting children, especially those with special needs, and to ensure that the credit remains relevant over time.
For more information related to the adoption credit and the recent changes resulting from the OBBBA, contact GBQ. Let us help you navigate the new rules and secure your financial future!
By Tara Bollinger, CPA, CMA, CGMA, Director, Tax & Advisory
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