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Have an Adoption Credit Carryover? You May Be Due a 2025 Refund
Families who adopted a child in a prior year may receive an unexpected benefit from a recent IRS administrative change involving the adoption tax credit. In News Release IR-2026-123 (October 16, 2026), the IRS stated that it has begun adjusting accounts and issuing refunds to eligible taxpayers whose 2025 returns included adoption tax credit carryforwards from earlier years. The IRS says more than 50,000 taxpayers are expected to benefit.
The announcement affects taxpayers who filed 2025 federal income tax returns before April 15, 2026 (returns filed under an extension will be reviewed later in 2026), and may have been entitled to treat some of their prior-year adoption credit carryforward as refundable. The IRS expects the refund process for most eligible taxpayers to be completed by the end of 2026. In general, taxpayers do not need to file an amended return to receive the additional amount.
The development is important because the adoption tax credit has traditionally been nonrefundable. The One Big Beautiful Bill Act, or OBBBA, changed that rule beginning in 2025 by allowing a limited portion of the credit to be refundable. The IRS announcement addresses how that new refundable portion interacts with unused adoption credit carried forward from earlier tax years.
Overview of the Adoption Tax Credit
The federal adoption tax credit is available to individuals who pay qualified adoption expenses in connection with adopting an eligible child. The credit is generally claimed on Form 8839, Qualified Adoption Expenses.
Qualified expenses may include reasonable and necessary adoption fees, attorney fees, court costs, travel expenses directly related to the adoption, and certain other costs. The credit may apply to domestic adoptions, foreign adoptions, and adoptions of children with special needs, subject to the applicable statutory requirements.
For the adoption of a U.S. child with special needs, the full credit is generally allowed even if the family paid little or no qualified expenses. Expenses to adopt a spouse’s child do not qualify.
For 2025, the maximum adoption credit is $17,280 per eligible child. The credit begins to phase out when modified adjusted gross income exceeds $259,190 and is completely phased out at modified adjusted gross income of $299,190 or more. These amounts are adjusted periodically for inflation.
The credit is subject to special timing rules. The year in which expenses are treated as paid or the year in which an adoption becomes final depends on whether the adoption is domestic, foreign, successful, unsuccessful, or finalized. For example, expenses related to an unsuccessful domestic adoption generally may be claimed in the year after the expenses are paid or incurred. For a domestic adoption, expenses paid before the year the adoption becomes final are generally claimed in the year after they are paid, and expenses paid in or after the year of finality are claimed in the year paid. Expenses for a foreign adoption generally cannot be claimed until the year the adoption becomes final.
Foreign adoptions involve additional rules. The year of finality may depend on whether the adoption occurred in a Hague Convention country or a non-Hague country. Taxpayers should retain adoption decrees, court orders, immigration documents, and other records supporting the date and completion of the adoption.
How the Adoption Credit Carryforward Works
Before the OBBBA change, the adoption tax credit was generally nonrefundable. That meant the credit could reduce federal income tax to zero, but it could not ordinarily generate a refund by itself.
If a taxpayer had more allowable adoption credit than tax liability for the year, the unused nonrefundable portion could be carried forward. The carryforward could be used in later years, subject to the statutory time limit and other restrictions.
An adoption credit carryforward generally may be used for up to five years after the year in which the credit originally arose. Carryforwards are applied on a first-in, first-out basis, meaning the oldest available credit is generally used first.
For example, assume a taxpayer generated a $17,280 adoption credit in 2025 but had only $10,000 of tax liability before credits. The taxpayer could use $10,000 of nonrefundable credit in 2025 and carry the remaining $7,280 forward, assuming the credit was otherwise allowable.
The taxpayer could not carry forward the portion of adoption expenses that exceeded the statutory credit limit. In other words, if a taxpayer paid $20,000 of qualified expenses but the maximum available credit was $17,280, the extra $2,720 would not become a future adoption credit.
A carryforward also does not revive credit that was lost because of the income limitation. If a taxpayer’s income was too high for the credit to be allowed, the disallowed amount generally cannot be carried to a later year. However, a valid credit carried from an earlier year is not generally subjected to a new income phaseout in the carryforward year. The carryforward remains subject to the dollar and tax-liability limitations applicable when it is used.
The OBBBA Creates a Refundable Portion Beginning in 2025
The OBBBA changed the adoption tax credit beginning with tax years after December 31, 2024. Under the new rule, up to $5,000 of the adoption credit may be refundable for 2025. The $5,000 amount is adjusted for inflation in later years.
A refundable credit can generate a refund even when the taxpayer has little or no remaining federal income tax liability. That is the primary difference between a refundable credit and a nonrefundable credit.
For 2025, a taxpayer may therefore have both:
A refundable adoption credit portion, limited to $5,000 per qualifying child; and
A nonrefundable adoption credit portion that can reduce federal income tax but generally cannot exceed the taxpayer’s tax liability.
The refundable portion cannot be carried forward. This means a refundable amount that is not used in the year it is allowed generally does not become a refundable credit in a later year.
The basic structure can be illustrated with a taxpayer who has a $17,280 adoption credit and $15,000 of federal income tax before credits. Under the ordinary calculation, up to $5,000 may be treated as refundable, while the remaining allowable credit is used as a nonrefundable credit, limited by the taxpayer’s tax liability. Any remaining valid nonrefundable credit may be carried forward, subject to the five-year rule.
In this example, the $12,280 nonrefundable portion reduces the $15,000 of tax to $2,720. The $5,000 refundable portion then eliminates the remaining $2,720 of tax and produces a $2,280 refund, so nothing is carried forward.
What IR 2026-123 Changes for 2025
The issue addressed by IR 2026-123 is the treatment of adoption credit carryforwards from prior years. The IRS announced that, for tax year 2025, prior-year adoption credit carryforwards from 2020 through 2024 may increase the amount of adoption credit treated as refundable, subject to the $5,000-per-qualifying-child limitation. The IRS describes this as a one-time exception that applies to tax year 2025 only.
This is significant for taxpayers who entered 2025 with unused adoption credit from an earlier year. Under the IRS’s clarified interpretation, some of that prior-year carryforward may produce an additional 2025 refund even if the original credit was nonrefundable when first claimed.
The IRS indicated that it would make the adjustment administratively. Eligible taxpayers generally do not need to file amended 2025 returns. Instead, the IRS will review affected accounts, adjust the adoption credit, and issue any resulting refund.
The IRS expects to send a notice, generally within 30 days after making an adjustment. The notice should explain the amount of the adjustment and whether it resulted in a refund or was applied against another tax or nontax debt.
Taxpayers should carefully compare the notice with their 2025 tax return. The adjustment may not appear as a separate refund labeled “adoption credit.” It may instead be reflected as an account adjustment that changes the amount of tax, credit, or overpayment shown on the taxpayer’s account.
Who May Be Affected?
The announcement may affect taxpayers who meet the following conditions:
They had a valid adoption credit carryforward from 2020 through 2024.
They filed a 2025 federal income tax return.
Their return included or should have included adoption credit information.
They were eligible for additional refundable treatment under the IRS’s 2025 interpretation.
Their account does not have an unresolved issue preventing the adjustment.
The IRS stated that taxpayers who filed before April 15, 2026, will generally receive any applicable adjustment automatically. Taxpayers who filed under an extension may be reviewed later, after the return has been processed.
The IRS also identified several situations that may delay review. These include identity theft indicators, account freezes, dependency conflicts, or other unresolved account issues. In those cases, the IRS may wait until the underlying problem is resolved before calculating and issuing the additional refund.
Not every taxpayer with an adoption credit carryforward will receive an additional payment. The taxpayer must have a valid remaining credit, must satisfy the applicable adoption credit rules, and must have enough allowable refundable credit under the 2025 limitation. The IRS adjustment may also be reduced or offset by another federal tax balance or qualifying nontax debt.
What Taxpayers Should Do Now
Most eligible taxpayers do not need to file an amended return solely because of IR 2026-123. They should, however, take several practical steps.
First, review the 2025 return and identify whether an adoption credit carryforward was reported. The taxpayer should locate prior Forms 8839, adoption credit carryforward worksheets, and notices showing the remaining balance.
Second, verify that the carryforward has not expired. Because the credit generally follows a five-year limitation and first-in, first-out ordering, older credit may be used or expire before newer credit.
Third, monitor the IRS account and mail for an adjustment notice. Taxpayers should compare the notice to their tax records and confirm that the adjustment appears reasonable.
Fourth, retain adoption records. Important documents may include adoption decrees, court orders, proof of qualified expenses, state special-needs determinations, prior Forms 8839, and records of credit carryforwards.
Finally, taxpayers may create or use an IRS Individual Online Account to view tax records, notices, refund information, and account activity. The online account may help taxpayers determine whether the IRS has processed the adjustment before the paper notice arrives.
The Bottom Line
The adoption tax credit remains a valuable federal tax benefit for qualifying families. For 2025, the OBBBA added a refundable portion of up to $5,000, while the maximum overall credit is $17,280 per eligible child.
IR 2026-123 provides potentially favorable relief for taxpayers who carried unused adoption credit into 2025. Under the IRS’s clarified interpretation, certain carryforwards from 2020 through 2024 may increase the refundable portion of the 2025 adoption credit. This treatment applies to tax year 2025 only.
The IRS says it will generally make the adjustment automatically and issue refunds without requiring eligible taxpayers to file amended returns. Taxpayers should monitor their IRS accounts, review any adjustment notice, and preserve supporting adoption-credit records. If the IRS does not make an expected adjustment or a notice differs substantially from your records, contact this office for assistance.
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