For most of its history, the federal adoption tax credit had a catch: it could only reduce the taxes you owed. If your tax bill was smaller than the credit, the difference did you no good that year, and families with modest incomes, including many foster and kinship families, saw little of a benefit that was designed for them.
That changed with the federal tax law signed in July 2025. Beginning with tax year 2025, a portion of the adoption credit is refundable, which means eligible families can receive it as a refund even if they owe no federal income tax at all. With 2025 returns being filed this year and year-end approaching for families mid-adoption in 2026, here is how the credit works now.
One note before the numbers: Stuart & Blackwell are adoption attorneys, not tax advisors. This post summarizes IRS guidance so you know what to ask about. Confirm your own situation with a CPA or tax professional.
The Numbers at a Glance
- Tax year 2025 (returns filed in 2026): maximum credit of $17,280 per eligible child, of which up to $5,000 is refundable. The credit begins to phase out at modified adjusted gross income of $259,190 and is gone at $299,190.
- Tax year 2026 (returns filed in 2027): maximum credit of $17,670 per eligible child, of which up to $5,120 is refundable. The phase-out runs from $265,080 to $305,080.
- The credit is claimed on IRS Form 8839, is applied per child rather than per year, and both the credit amount and the refundable portion are now indexed for inflation.
What “Partially Refundable” Actually Means
The credit now works in two layers. The refundable portion, up to $5,000 for 2025, comes back to you as a refund regardless of your tax liability. The remainder is nonrefundable: it offsets taxes you owe, and any unused nonrefundable amount can still be carried forward for up to five years.
One wrinkle the IRS has flagged: Carryforward amounts from earlier years stay nonrefundable. You cannot convert an old unused credit into a refundable one. The refundable portion applies to the credit as calculated for the current year.
The practical difference is biggest for families with low or moderate tax bills. The IRS’s own example category is a family with no federal income tax liability at all: under the old rules they received nothing in that year; under the new rules they receive up to $5,000 as a refund.
What Counts as a Qualified Adoption Expense
Qualified adoption expenses are the reasonable and necessary costs directly related to adopting an eligible child, including:
- Adoption attorney fees and court costs
- Agency fees
- Home study and certification costs
- Travel expenses, including meals and lodging while away from home for the adoption
- Re-adoption expenses for a child adopted internationally
Some things do not count:
- Adopting your spouse’s child. Stepparent adoptions are excluded from the credit entirely.
- Surrogacy arrangements.
- Expenses reimbursed by your employer, a government program, or anyone else.
- Expenses that violate state or federal law.
The Special Needs Rule: Full Credit With No Expenses
Families who adopt a child whom the state has determined to have special needs are treated as having qualified expenses equal to the full credit amount in the year the adoption is finalized, even if they paid nothing out of pocket. For a 2025 finalization, that is the full $17,280, including the $5,000 refundable portion.
“Special needs” here is a legal determination, not a medical one. In Arizona, it generally corresponds to the state’s determination that a child cannot or should not be returned home and is unlikely to be adopted without assistance, which is the same finding that underlies an adoption subsidy agreement with the Department of Child Safety. Most children adopted from Arizona foster care qualify. If you have an adoption subsidy agreement, bring it to your tax preparer.
Two related points:
- Starting with 2025, Indian tribal governments also have authority to make the special needs determination for purposes of the credit, a change that matters for children adopted through tribal courts and welfare systems.
- The federal credit sits alongside, not instead of, Arizona’s adoption subsidy programs. Monthly maintenance subsidies, medical coverage, and nonrecurring expense reimbursement under A.R.S. section 8-162 are separate benefits. Our guide to Arizona special needs adoption benefits and subsidies covers those in detail, including the DCS subsidy rule amendments that took effect in April 2026.
When You Claim the Credit: Timing Rules
The timing rules trip up more families than any other part of the credit.
- Domestic adoption, before finalization: expenses paid in any year before the adoption is final are claimed in the year after you paid them, even if the adoption is not yet final.
- The year of finalization: expenses paid in the finalization year are claimed that year.
- After finalization: expenses paid later are claimed in the year paid.
- Failed domestic adoptions: expenses from a domestic adoption attempt that does not succeed are still eligible, claimed in the year after payment. Note that expenses across attempts to adopt one child are combined toward the single per-child cap.
- International adoptions: different rule entirely. No expenses can be claimed until the year the adoption becomes final, and a failed international adoption yields no credit.
For a family that paid a home study in 2024, attorney fees in 2025, and finalized in 2026, the credit can land across more than one return, with a single per-child cap governing the total. This is exactly the kind of sequencing a CPA should map out for you.
Employer Adoption Assistance
Separately from the credit, if your employer offers an adoption assistance program, you can exclude up to $17,280 of employer-paid adoption benefits from your income for 2025 ($17,670 for 2026). The exclusion and the credit can be used in the same adoption, but never for the same dollar of expense. If your employer reimbursed your agency fee, that fee cannot also generate credit. The exclusion phases out over the same income range as the credit.
Arizona-Specific Notes
- The adoption credit is federal. Arizona does not offer a separate state adoption tax credit, so the federal rules are the whole picture for the credit itself.
- Arizona families adopting from foster care should look at the full stack: the federal credit under the special needs rule, the DCS adoption subsidy, Medicaid coverage that typically accompanies it, and nonrecurring expense reimbursement under A.R.S. section 8-162.
- Court-approved attorney fees in a private adoption (which Arizona requires under A.R.S. section 8-114) are qualified expenses, so keep your verified accounting from the adoption case with your tax records.
Year-End Planning If You Are Mid-Adoption in 2026
A few questions worth raising with your tax professional before December 31:
- If your adoption will finalize in early 2027, expenses paid in 2026 before finalization are claimed on your 2027 return, while a 2026 finalization pulls 2026 expenses into the 2026 return. Where finalization timing is flexible, it can shift which year’s cap and income thresholds apply.
- If your income sits near the phase-out range, remember the phase-out applies to the whole credit, refundable portion included.
- Keep every receipt, invoice, and the final decree. The IRS has historically reviewed adoption credit claims closely, and documentation resolves most questions before they start.
Questions About the Legal Side of Your Adoption?
Stuart & Blackwell handles private, foster care, stepparent, kinship, and adult adoptions throughout Arizona, and we work alongside our clients’ tax professionals to make sure the legal records they need, from the verified expense accounting to the subsidy agreement to the final decree, are complete and in hand at tax time. Contact us at stuartandblackwell.com/contact or call (480) 420-2900.
This article summarizes federal tax provisions for general information and is not tax or legal advice. Figures are for tax years 2025 and 2026 as published by the IRS and are adjusted annually. Consult a qualified tax professional about your own return.