Adoption Tax Credit Set to Become Fully Refundable Starting in 2026

This bill, the Adoption Tax Credit Refundability Act of 2025, proposes a significant change to how the federal adoption tax credit works. Starting with tax years beginning after December 31, 2025, the legislation aims to make the existing adoption tax credit fully refundable. Currently, the credit is non-refundable, meaning it can only reduce the amount of tax you owe down to zero; you don't get any leftover credit back as a refund. This bill changes that.

Cash Back for Adopting Families

The core change here is making the credit refundable (Section 2). Let's break that down: If the adoption tax credit you qualify for is more than the income tax you owe for the year, under this bill, you'd receive the difference back as a cash refund. This is a big deal, especially for lower and middle-income families who might have significant adoption expenses but a smaller tax liability. Previously, these families might not have been able to use the full value of the credit. This change, renaming the credit's location in the tax code to Section 36C, ensures the financial benefit reaches more adoptive parents regardless of their tax bill size. For those with unused credits from the year before this change takes effect, the bill allows that carryover amount to be added to the new refundable credit in the first applicable tax year.

Streamlining the Paperwork

Beyond refundability, the bill also directs the IRS to create guidance for a standardized third-party affidavit (Section 2, amending 36C(h)). This aims to simplify how families verify their legal adoption expenses or confirm the adoption of a child with special needs when claiming the credit. Standardizing this process could mean less confusion and potentially quicker processing for families navigating the already complex adoption journey.