What type of credit is the Adoption Credit?

The Adoption Credit is classified as a nonrefundable credit for qualified adoption expenses, meaning it can reduce a taxpayer's tax liability to zero, but it cannot result in a refund if the credit exceeds the amount of taxes owed. This characteristic of the Adoption Credit is significant because it allows adoptive parents to offset their tax liability based on the expenses incurred during the adoption process.

The credit covers eligible expenses related to the adoption, such as court costs and legal fees, but it does not provide cash back to the taxpayer beyond reducing their tax owed. Therefore, if a taxpayer's tax liability is less than the amount of the credit, they will not receive a refund for the difference. The nonrefundable nature of this credit is designed to assist taxpayers financially in the adoption process while also ensuring that it functions within the limits of tax law.