The Internal Revenue Service has proposed a rules change that will make some legal residents of the United States ineligible for the Adoption Tax Credit. The Adoption Tax Credit allows adoptive parents and prospective adoptive parents to deduct expenses for adoption from their taxes. As much as $5,000 of the credit is refundable: that is, if you owe less than $5,000 in taxes, the difference will be sent to you as a refund. However, if the proposed new rules are accepted, some residents of the United States will no longer be eligible for the refundable amount.
What’s refundable?
Let’s say you owed $10,000 in taxes in 2023, based on your income and tax bracket. You had $16,000 in eligible adoption expenses, so you had a $13,000 tax credit. Instead of owing $10,000, you owed nothing. The tax credit reduced your taxes owed to nothing.
In tax year 2025, though, if you owed $10,000 and had a $13,000 adoption tax credit, you would have received a $3,000 refund. That’s because the tax credit became refundable. The part over your taxes owed could be refunded to you.
What’s changed?
The IRS is preparing to redefine that refunded amount. Instead of being a tax refund, it will be considered federal public benefits. That change of definition will limit who is able to receive the refund.
In order to receive the refund, the taxpayer (or one of the taxpayers, for married couples filing jointly) must be a U.S. citizen or a qualified alien. U.S. citizens are eligible for a refund of the refundable portion, up to $5,000.
Who’s a qualified alien?
A legal permanent resident, or holder of a green card, is a qualified alien. So is a citizen of one of the free associated states, such as the Marshall Islands. Nationals of these countries can live and work freely in the United States. People in these groups can receive the refund.
Examples of unqualified aliens:
- Non-citizens living temporarily in the United States while working or going to school. These individuals are legally present in the United States and may be in the U.S. for many years pursuing their studies and working, often at a time of life when they are most likely to want to grow their families.
- DACA immigrants. These are people who were brought as children to the United States without the correct documents. They are legally allowed to live and work in the United States, but not to receive federal benefits.
- Immigrants with Temporary Protected Status who are allowed to live in the United States legally because of ongoing wars or other issues in their home countries.
- Undocumented aliens.
These people, who are not qualified aliens, can still claim the Adoption Tax Credit on their taxes if they file a U.S. tax return. They cannot receive the refund, though. Their credit can only reduce their taxes owed to $0.
As of this writing, the change has not become law.
Adoption can bring up lots of questions. Heimer Law can answer your questions about adoption and help you through the adoption journey.
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