What the H.R.1 Bill Means for the 2025 Adoption Tax Credit

With the passing of the H.R.1 Reconciliation Bill, federal adoption tax credits have become more beneficial in 2025. There were a few adjustments made, with the most notable one being the opportunity to receive a refund of part of this credit. Beginning in 2025, taxpayers who incur qualified adoption expenses can claim this credit as a refund of up to $5,000, with any excess carried forward for up to five years. The carryforward amount can only be used to reduce tax liability in the following years. This change is crucial to consider for those who have little to no tax liability. For others, there is an allowable credit against tax of up to $17,280 for adoption expenses. It is important to note that the full credit gets reduced once modified adjusted gross income (MAGI) surpasses $259,190 and becomes fully eliminated when MAGI exceeds $299,190.

To qualify for the credit, the adopted child must be under the age of 18, unless they cannot physically or mentally take care of themselves. Qualified expenses include all expenses related to the legal adoption process, which includes court costs, legal fees, and even travel expenses. Expenses can qualify even before identifying a specific child to adopt. There are some timing differences for claiming the credit depending on the nature of the adoption. With international adoption, the credit must be taken in the year the adoption is finalized. Domestic adoption gives the option to claim either when the adoption is finalized or in the year after the payments were made. An adoption of a spouse’s child or a surrogate parenting agreement does not qualify as an adoption.

Another noticeable change is that IRC Section 23(d)(3) was amended to allow Indian tribal governments, along with states, to determine special needs status for adoption credit purposes. If a child is deemed special needs, the federal adoption credit applies to the adoption of any eligible child—defined as an individual under age 18 or someone physically or mentally incapable of self-care—regardless of the amount of qualified expenses incurred. Families adopting a U.S. child with special needs can claim the full adoption credit, even if they had little or no qualified expenses.

Adopting a child is a gesture that goes beyond the tax breaks, but since it is an expensive process, it is nice to have some tax relief for it. If you have adopted a child in 2025 and believe you could be eligible for this credit, we can help you fill out IRS Form 8839 and attach it to your 1040 upon filing your tax return.

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