For years, a married couple earning $38,000 who adopted a child out of foster care might owe only $1,500 in federal income tax. The adoption tax credit could wipe that bill to zero, but the thousands of dollars left over just sat there on paper, carried forward year after year, often expiring before the family could ever touch it. That changes now. Under the One, Big, Beautiful Bill Act, signed into law in 2025, Internal Revenue Code Section 23 has been rewritten so that up to $5,000 of the adoption credit is refundable. The IRS will send that money to qualifying families as a refund check even if they owe little or nothing in tax. The provision takes effect for tax year 2025 returns, which most families will file in early 2026.
How the credit worked before and what Section 70402 changed
The federal adoption tax credit has existed for decades. For 2025, the maximum credit is expected to be roughly $17,280 per eligible child, up from $16,810 in 2024, based on the annual inflation adjustment the IRS applies under IRC Section 23(h). But until now, every dollar of it was nonrefundable. The credit could reduce a family’s tax liability to zero and no further. Any leftover amount rolled into a carryforward that lasted up to five tax years. For higher earners with large tax bills, the credit worked as designed. For lower- and moderate-income families, much of it simply evaporated unused.
Section 70402 of H.R. 1 added a new paragraph to IRC Section 23(a), carving out a refundable layer. The two layers now work together like this:
- Refundable layer (new): Up to $5,000 per qualifying child can be paid out as a direct refund, regardless of how much tax the filer owes. This cap is indexed for inflation and will rise in future years.
- Nonrefundable layer (unchanged): Any credit amount above the $5,000 refundable cap still operates the traditional way. It can reduce tax liability to zero, and unused portions can be carried forward for up to five years.
One important restriction: credit amounts carried forward from prior tax years do not count toward the refundable portion. Only the current-year credit qualifies. A family that finalized an adoption in 2023 and has been rolling unused credit into 2024 and 2025 cannot convert those older balances into a refund. However, if that same family incurs new qualified adoption expenses in 2025 or later, the fresh credit could qualify for refundability while the older carryforward remains nonrefundable.
The IRS confirmed this distinction in its FAQ on refundability and tribal special-needs determinations, though the agency has not yet published worked examples for families juggling mixed old and new balances.
Who actually benefits
The families most affected are those whose incomes are high enough to adopt but low enough that their federal tax bill falls well below the credit’s value. Consider a married couple earning $45,000 with a federal tax liability of $2,500. Previously, they could use $2,500 of the credit and carry the rest forward, hoping future earnings would let them chip away at it before the five-year window closed. Now, they can still zero out that $2,500 liability with the nonrefundable portion and receive up to $5,000 as a direct refund from the refundable portion. That is real cash toward legal fees, home-study costs, or the everyday expenses of welcoming a child.
The credit begins to phase out for taxpayers with modified adjusted gross income above roughly $252,150 (based on the 2024 threshold; the IRS has not yet published the inflation-adjusted 2025 figure) and disappears entirely at higher income levels. Families well above that threshold were already unlikely to have unused credit, so the refundability provision is targeted, by design, at the lower end of the income spectrum. Both domestic and international adoptions qualify, as do adoptions of children with special needs.
One question the legislation does not directly address: whether the refundable portion counts as income for purposes of means-tested benefit programs such as SNAP, Medicaid, or housing assistance. Tax refunds from certain credits, like the Earned Income Tax Credit, are generally excluded from income calculations for federal benefit programs for 12 months after receipt. Families relying on those programs should verify with a benefits counselor or tax professional whether the same exclusion applies here.
Tribal governments and special-needs determinations
A second change in the same legislation addresses a longstanding gap. Under prior law, only a U.S. state or the District of Columbia could certify that a child had special needs for purposes of the adoption credit. That left out children placed through Indian tribal child-welfare systems, even when those children faced the same barriers to permanent placement.
The new law grants Indian tribal governments the authority to make special-needs determinations on par with state agencies. The practical significance is substantial: when a child is designated as having special needs, the adoptive family can typically claim the full credit amount without itemizing every qualified expense dollar by dollar. Extending that framework to tribal placements removes a barrier that disadvantaged Native children and the families willing to adopt them.
Consider a family working with a tribal child-welfare office in Oklahoma to adopt a sibling group. Under the old rules, even if the tribe determined that the children had special needs due to medical conditions or the difficulty of placing siblings together, that tribal determination carried no weight for the federal tax credit. The family would have had to obtain a separate state certification or document every expense individually. Under the new law, the tribe’s own finding is sufficient, streamlining the process and treating tribal governments the same way state agencies have always been treated.
The IRS has acknowledged the change in its published guidance on One, Big, Beautiful Bill provisions but notes that individual tribes will need to establish their own certification procedures. As of June 2026, no public timeline exists for when those procedures will be standardized. Families pursuing tribal-system adoptions should expect some administrative uncertainty in the near term, particularly when children move between tribal and state jurisdictions before an adoption is finalized.
What families should watch for when filing
The refundable portion adds a new calculation layer to Form 8839 (Qualified Adoption Expenses), and the IRS has not yet released updated draft forms or instructions reflecting the change. Until it does, several practical questions remain open:
- Software readiness: Major tax-preparation platforms such as TurboTax, H&R Block, and FreeTaxUSA will need to update their adoption-credit modules. Errors in that process could disproportionately affect the lower-income filers the provision is designed to help.
- Awareness: The adoption credit has historically been claimed by a relatively small number of filers. If eligible families do not know the refundable option exists, take-up could remain low. Free tax-preparation programs such as VITA (Volunteer Income Tax Assistance) and Tax Counseling for the Elderly will play a critical role in reaching those families.
- Employer adoption assistance: Some employers offer adoption-assistance programs under IRC Section 137. Families receiving employer-paid adoption benefits should work with a tax professional to understand how those payments interact with the credit, since expenses reimbursed by an employer generally cannot also be claimed for the credit.
- Revenue projections: Neither the IRS, the Treasury Department, nor the Joint Committee on Taxation has published a detailed estimate of how many families will claim the refundable portion or what it will cost the government annually. Without that data, the real-world scale of the change is difficult to gauge.
Adoptive families filing 2025 returns in early 2026 should confirm with a qualified tax professional that their preparer or software correctly splits the credit into its refundable and nonrefundable components. Families with carryforward balances from earlier years should be especially careful, since those older amounts remain nonrefundable and must be tracked separately.
Why the $5,000 refundable cap matters more than its size suggests
The $5,000 refundable cap is a fraction of the total adoption credit, and it will not cover the full cost of most adoptions. Those costs can range from minimal fees in foster-care cases to $50,000 or more for private domestic or international placements, according to the Child Welfare Information Gateway. But for families whose tax bills have always been too small to absorb the credit, the new provision converts what was essentially a symbolic benefit into money they can deposit.
Combined with the tribal-government parity provision, these changes represent the most significant update to the federal adoption tax credit in over a decade. The test now is execution: whether the IRS, tax software companies, and tribal authorities can translate the statutory language into a filing process that actually works for the families it was written to help.
David M. Keller is a finance writer based in Columbus, Ohio, covering personal finance and consumer-focused economic topics. He earned his degree in journalism from Ohio University and began his career reporting on local business and economic trends for a regional media outlet. Since then, he has contributed to a variety of online publications, focusing on clear, practical coverage of topics such as cost of living, debt, and everyday financial decision-making.
