The Treasury Department and the IRS issued a fact sheet on Feb. 27 that clarifies two changes to the adoption tax credit in President Donald Trump’s tax law that was enacted last July.
The fact sheet features several questions and answers related to the general refundability and recognizing Indian tribal governments for purposes of making a special needs determination for the adoption credit.
The adoption tax credit is based on a taxpayer’s qualified adoption expenses, which are limited to $17,280 per qualifying child for 2025. If a taxpayer adopts a child with special needs, the taxpayer might be able to claim the maximum adoption tax credit.
The One Big Beautiful Bill Act made two principal changes to the credit:
- Making the adoption tax credit refundable up to $5,000 (indexed for inflation). The nonrefundable portion of the credit can be carried forward for a maximum of five years; however, it can’t result in a refund. Any remaining nonrefundable portion after five years is forfeited.
- Before the OBBBA, only state governments could make a determination of whether a child has “special needs” for purposes of the adoption tax credit. The OBBBA now provides parity for Indian tribal governments so that state government and Indian tribal government determinations of special needs are both recognized for purposes of the adoption tax credit.
These changes apply to tax years beginning after 2024.
Recommended Articles
For example, the first Q&A for the section on Indian tribal government determinations of a “child with special needs” is:
Q1. Can a tribal government designate an adoptee, without a physical or mental disability, as “special needs”?
A1. Yes, “a child with special needs” for purposes of the adoption tax credit may have a different meaning from “a child with special needs” for other purposes. For your child to be considered a “child with special needs,” a State or Indian tribal government must have determined that (A) the child cannot or should not be returned to the home of the child’s parents; (B) the State or Indian tribal government has determined that there exists with respect to the child a specific factor or condition (such as their ethnic background, age, or membership in a minority or sibling group, or the presence of factors such as medical conditions or physical, mental, or emotional handicaps) because of which it is reasonable to conclude that such child cannot be placed with adoptive parents without providing adoption assistance; and (C) the child is a citizen or resident of the United States including its possessions.
For more information, see Adoption Expenses on IRS.gov.
Photo credit: gregobagel/iStock
Thanks for reading CPA Practice Advisor!
Subscribe Already registered? Log In
Need more information? Read the FAQs
