in-20260610-IR-045260170NRA: Information Bulletin #111

DEPARTMENT OF STATE REVENUE Information Bulletin #111 Income Tax May 2026 Effective Date: January 1, 2022 (Retroactive) (Replaces Bulletin #111, dated February 2026) SUBJECT: Income Tax Credit for Eligible Adoptions REFERENCES: IC 6-3-3-13; IRC section 23 DISCLAIMER: Information bulletins are intended to provide nontechnical assistance to the general public. Every attempt is made to provide information that is consistent with the appropriate statutes, rules, and court decisions. Any information that is not consistent with the law, regulations, or court decisions is not binding on either the department or the taxpayer. Therefore, the information provided herein should serve only as a foundation for further investigation and study of the current law and procedures related to the subject matter covered herein. SUMMARY OF CHANGES Other than technical, nonsubstantive adjustments, this bulletin is updated to reflect statutory changes from the 2026 legislative session that limited the Indiana adoption credit to Indiana resident individuals, along with a limited allowance for nonresident individuals who claimed the adoption credits prior to the statutory change. INTRODUCTION Indiana provides an adjusted gross income tax credit for individuals who are eligible to claim the federal tax credit for eligible adoption expenses. For tax year 2022 and later, the credit is the lesser of $2,500 per eligible child or 20% of the federal adoption credit, which is refundable if the credit exceeds the taxpayer's Indiana adjusted gross income tax liability. Senate Enrolled Act 212 (2026) provides that Indiana follows the federal allowance for the federally-refundable tax credit for 2025 and later as a result of the revision of the definition of “Internal Revenue Code” to July 4, 2025, the effective date of P.L. 119-21 (H.R. 1). The bill also grants Indian tribal governments the authority to determine if a child is a child with special needs for purposes of the federal adoption credit. Senate Enrolled Act 243 (2026) provides that the credit is only available to individuals who were Indiana residents during the year the federal credit was claimed. The bill also provides a proportional allowance for individuals who are Indiana residents for a portion of the year and special rules for married couples where one or both are Indiana residents. AMOUNT OF CREDIT An individual who is eligible to claim the federal credit for adoption on the individual's federal return for the taxable year is entitled to a credit against the individual's Indiana adjusted gross income tax liability. The credit is equal to the lesser of: For 2025 and later, the federal credit includes the refundable portion allowed under IRC § 23(a)(4). In addition, for purposes of the allowance related to children with special needs, Indiana follows the expanded allowance for determinations by Indian tribal governments. In the case of a child for whom a federal adoption credit is available for multiple years (e.g., a federal credit carryforward or expenses incurred for which the federal credit is allowable in multiple years), the maximum Indiana adoption credit for the eligible child is limited to $2,500 for all years. The $2,500 limit for 2022 and later is also reduced by any pre-2022 Indiana adoption credits claimed for the eligible child. Effective for tax year 2022 and later, if the Indiana adoption credit exceeds a taxpayer's Indiana adjusted gross income tax liability, the excess Indiana adoption credit is treated as a refundable credit to the taxpayer. In other words, if a taxpayer's Indiana adjusted gross income tax liability for 2022 is $1,500 before credits and the Indiana adoption credit for 2022 is $2,000, the full $2,000 credit is allowed in 2022. For purposes of applying the limitation, the federal credit for a taxable year will be prorated across the federal credit allowable for each child. In addition, if a federal adoption credit is claimed over multiple years, this computation will be made separately each year for the federal credit determined for that taxable year. SPECIAL RULES FOR PART-YEAR AND FULL-YEAR NONRESIDENTS If an individual is not a resident of Indiana for all of the taxable year in which they claim the federal adoption credit, they cannot claim the Indiana adoption credit for 2022 and later. If an individual is married filing a joint return, this disallowance applies if both the individual and their spouse are not Indiana residents at any time during the taxable year. If an individual and/or their spouse are residents of Indiana for part of the taxable year in which they claim the federal adoption credit, the portion of the federal adoption credit used to determine the Indiana adoption credit is prorated based on the number of days the individual and/or their spouse are Indiana residents during the taxable year. If they file a return as a single individual, the federal credit claimed is multiplied by the ratio of days they are an Indiana resident compared to their days as a resident everywhere. If an individual files a joint return with their spouse, the federal credit is multiplied by the ratio of the combined days the individual and their spouse are Indiana residents compared to the combined days the individual and their spouse are residents everywhere. The proration rules are based on the year in which the federal adoption credit is claimed. If the federal adoption credit is carried over from a prior year, an individual's residence for the year in which the credit was earned is not considered. Though the requirement for a credit claimant being an Indiana resident applies retroactively to 2022, Indiana will not disallow a credit claimed by a nonresident on returns filed before March 1, 2026 based solely on the claimant's lack of Indiana residence. Any claims are subject to review for other issues related to the determination of the credit. RECORDKEEPING AND OTHER REQUIREMENTS When claiming the Indiana adoption credit, an individual must keep a copy of their federal Form 8839 for the current year and any previous years from which the credit was carried forward. The department may request a copy of the Form 8839 for the current and previous years in order to verify the proper amount of the credit including any prior-year worksheets. In addition, if the child for whom the individual is claiming is not listed as a dependent, they may be asked to provide information explaining why the child is not listed as a dependent child. If the federal adoption credit is adjusted, this could result in an adjustment to the Indiana tax liability. Any federal change to the adoption credit must be reported to Indiana by filing an amended Indiana income tax return within 180 days of the date the federal adjustment is finalized. If you have any questions concerning this bulletin, contact the Tax Policy Division at taxpolicy@dor.in.gov. _________________________