26 U.S.C. § 23 — Adoption expenses

(a) A taxpayer can claim a tax credit for the "qualified adoption expenses" they pay or incur. The credit for an expense is claimed the year after it is paid, if it is paid before the year the adoption becomes final — but if it is paid during or after the year the adoption becomes final, the credit is claimed that same year. When a child with special needs is adopted and the adoption becomes final in a given year, the taxpayer is treated as having paid $10,000 in qualified adoption expenses that year, minus whatever expenses were already counted in that year and prior years — so the full $10,000 credit is available regardless of actual costs. Up to $5,000 of the credit is refundable, meaning it is treated as a credit under subpart C rather than this subpart; the rest is not refundable. (b) The total qualified adoption expenses counted for one child's adoption, across all years, cannot exceed $10,000. The credit shrinks as income rises: it is reduced in proportion to how far the taxpayer's adjusted gross income exceeds $150,000, divided by $40,000 — so it phases out fully once that ratio reaches one, with adjusted gross income figured without regard to the foreign-income exclusions in sections 911, 931, and 933. No credit is allowed for an expense that is also deducted or credited under another provision of this chapter, or for an expense to the extent funds for it are received under a federal, state, or local program. (c) If the allowed credit exceeds what the taxpayer can use against the limitation in section 26(a) for the year, reduced by other subpart C credits, the excess carries forward to the next taxable year — but not beyond the fifth taxable year after the credit arose, and credit is treated as used on a first-in first-out basis. (d) "Qualified adoption expenses" are reasonable and necessary adoption fees, court costs, attorney fees, and other expenses that are directly related to, and mainly for, the legal adoption of an "eligible child" by the taxpayer; that are not incurred in violation of state or federal law or through a surrogate-parenting arrangement; that are not for adopting a child of the taxpayer's spouse; and that are not reimbursed under an employer program or otherwise. An "eligible child" is an individual who has not attained age 18, or who is physically or mentally incapable of caring for themselves. A "child with special needs" is a child for whom a state or Indian tribal government has determined the child cannot or should not return to their parents' home, and has determined a specific factor or condition exists — such as ethnic background, age, membership in a minority or sibling group, or a medical, physical, mental, or emotional condition — making it reasonable to conclude the child cannot be placed with adoptive parents without adoption assistance; the child must also be a citizen or resident of the United States. (e) For the adoption of a child who is not a citizen or resident of the United States, the credit applies only once the adoption becomes final, and any expense paid or incurred before the taxable year the adoption becomes final is taken into account as if paid or incurred in the year it becomes final. (f) Married couples generally must file a joint return to claim this credit, under rules similar to section 21(e). The taxpayer must include the eligible child's name, age, and taxpayer identification number, if known, on the tax return, unless the Secretary permits other identifying information instead. (g) If a credit is allowed under this section for an expenditure related to property, the increase in that property's basis that the expenditure would otherwise cause is reduced by the amount of the credit allowed. (h) For taxable years beginning after December 31, 2002, the dollar amounts in subsection (a)(3) and (4) and subsection (b)(1) and (2)(A)(i) — the $10,000 caps, the $5,000 refundable figure, the $150,000 income threshold, and the $40,000 phase-out range — are increased each year for inflation, using the cost-of-living adjustment method under section 1(f)(3), and rounded to the nearest multiple of $10. The $5,000 refundable-portion figure in subsection (a)(4) uses different substitute years for that calculation: 2025 in place of 2002, and calendar year 2024 in place of calendar year 2001. (i) The Secretary may prescribe regulations to carry out this section and section 137, including regulations treating unmarried individuals who pay or incur qualified adoption expenses for the same child as a single taxpayer when applying the dollar limits in subsections (a)(3) and (b)(1), and in section 137(b)(1).