IRS to Implement Mid-Season Adoption Credit Calculation Change
This revision will significantly boost refund amounts in tax year 2025 and forward
For families looking to adopt children, the §23 adoption credit is a valuable financial incentive that reimburses some or all of a parent’s adoption costs.
For tax year 2025, a taxpayer may claim a credit of up to $17,280 per eligible child. The credit applies to qualified adoption expenses, which include adoption fees, court costs, attorney fees, and other reasonable and necessary expenses directly related to the adoption. Expenses connected with adopting a spouse’s child do not qualify.
The credit works differently depending on the type of adoption:
For domestic adoptions, expenses are generally creditable in the year after they are paid, even if the adoption is not final.
For foreign adoptions, expenses are generally creditable in the year the adoption becomes final.
For special needs adoptions, a taxpayer may claim the full credit amount in the year the adoption becomes final, regardless of the actual expenses paid.
The adoption credit is subject to income phase-outs. For tax year 2025, the credit begins to phase out when modified adjusted gross income (MAGI) exceeds $259,190 and is completely phased out at $299,190.
Before tax year 2025, the credit was nonrefundable; however, the taxpayer can carry forward unused amounts for up to five years.
Credit Now Partially Refundable
§70402 of the One Big Beautiful Bill Act (OB3 Act) provided that up to $5,000 of the adoption credit per child is refundable, effective for tax year 2025. The IRS’s original interpretation of this new provision, reflected in the current version of Form 8839, Qualified Adoption Expenses, is that a carry forward credit is not eligible for the refundable portion.
However, on Monday, March 9, IRS CEO Frank Bisignano announced at a House Ways and Means Committee hearing that the IRS is changing its position on the refundable credit:
I am pleased to announce that for tax year 2025, carry-forward amounts of the adoption credit for prior years are refundable up to $5,000 per qualifying child, and the IRS is implementing this policy as expeditiously as possible without disrupting the current filing season. The IRS will publish additional information on this very soon. Taxpayers should continue to claim the credit as directed by the current forms and instructions during tax season, since the IRS is pursuing post-filing remedies to resolve this issue.
Based on the testimony, it appears the IRS may automatically adjust returns and issue refunds later this year, similar to what it did for the 2020 unemployment exclusion. However, one major complication is that the refundable amount is $5,000 per child, and carry forward credits are not allocated to a specific child on Form 8839.
The current version of Form 8839 lacks sufficient information to apply the forthcoming per-child calculation. In addition, there was no method in prior tax years to allocate unused credit amounts to a specific child, as it was unnecessary. The IRS’s forthcoming guidance must resolve these issues, and it will likely be messy, and the IRS’s potential automatic adjustments may be incorrect for some taxpayers.
Taxpayers with an adoption credit carry-forward from 2024 may want to delay filing their 2025 Form 1040 for a few weeks to see if future guidance is released.
Example
William has a $11,252 adoption credit carry-forward from tax year 2024, and has a tax liability limitation of $3,222. Using the current Form 8839 calculation method, his allowed 2025 credit is $3,222, and he would carry a $8,030 credit to tax year 2026.
Under the revised calculation method, if the $11,252 is attributable to one child, William would receive a $5,000 refundable credit and a $3,222 nonrefundable credit, for a total credit of $8,222, and he would carry a $3,030 credit to tax year 2026.
However, if the $11,252 is attributable to two children and the carry-forward is allocated pro rata, William would receive a $10,000 refundable credit ($5,000 for each child) and a $1,222 nonrefundable credit, for a total credit of $11,222.
Acknowledgements
Thank you to Ryan Reichert, EA, CFP(r), co-owner of Brass Tax Presentations, who heard about the issue and called me to discuss it.
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