Updated November 5, 2026. Quick answer: An employee can leave out of gross income up to $18,250 of employer-paid adoption expenses for 2027, per Rev. Proc. 2026-35, section 3.20, up from $17,670 for 2026. The exclusion begins to phase out at modified adjusted gross income above $273,680 and is gone at $313,680. It applies to benefits paid under a written employer adoption assistance program, and the same expenses cannot also earn the adoption credit.
The 2027 figures
The Revenue Procedure states: “For taxable years beginning in 2027, under § 137(b)(1) the maximum amount that can be excluded from an employee’s gross income for the amounts paid or expenses incurred by an employer for qualified adoption expenses furnished pursuant to an adoption assistance program for adoptions by the employee is $18,250.” “The amount excludable from an employee’s gross income begins to phase out under § 137(b)(2)(A) for taxpayers with modified adjusted gross income in excess of $273,680 and is completely phased out for taxpayers with modified adjusted gross income of $313,680 or more.”
| Tax year | Maximum exclusion | Phase-out starts above MAGI of | Exclusion gone at MAGI of | Source |
|---|---|---|---|---|
| 2025 | $17,280 | $259,190 | $299,190 | Instructions for Form 8839 (2025) |
| 2026 | $17,670 | $265,080 | $305,080 | Rev. Proc. 2025-32, section 4.18 |
| 2027 | $18,250 | $273,680 | $313,680 | Rev. Proc. 2026-35, section 3.20 |
The same section sets the same $18,250 for a child with special needs: “the amount that can be excluded from an employee’s gross income for the adoption of a child with special needs is $18,250.”
How the phase-out works, and a check
The statute reduces the exclusion by a ratio: “the amount (if any) by which the taxpayer’s adjusted gross income exceeds $150,000, bears to (B) $40,000.” Those statutory base amounts are indexed each year. Check: $313,680 minus $273,680 is $40,000 (computed), the statute’s $40,000 denominator, so the 2027 range is the statute’s width. At modified adjusted gross income of $293,680 (invented, for the computation), which is $20,000 over the start (computed), half the range (computed), an employee would exclude half of $18,250, or $9,125 (computed). These are illustration numbers.
What qualifies
The statute requires “a separate written plan of an employer for the exclusive benefit of such employer’s employees”. The IRS instructions add: “You can’t exclude employer-provided adoption benefits if your employer is an S corporation in which you own more than 2% of the stock or stock with more than 2% of the voting power.”
Where it goes on the return, and the credit overlap
The instructions say: “Use Form 8839, Part III, to figure the employer-provided adoption benefits you can exclude from your income on Form 1040, 1040-SR, or 1040-NR, line 1f.” And: “Employer-provided adoption benefits should be shown in box 12 of your Form(s) W-2 with code T.” The same instructions say “can’t claim both a credit and exclusion for the same expenses.” The line-by-line walk-through is on Form 8839 Part III, employer adoption benefits. The adoption credit for 2027 has its own page, the adoption credit for 2027, and the credit form is on Form 8839, the adoption credit.
Common mistakes
- Claiming the adoption credit on expenses the employer already paid. The same expenses cannot support both.
- Using $17,670 for 2027. That is the 2026 maximum; the 2027 maximum is $18,250.
- Assuming the exclusion works without a written plan. The statute requires a separate written plan for employees.
- Treating the exclusion as available to a more-than-2-percent shareholder of an S corporation employer.
Related: Form 8839 Part III, employer adoption benefits, the adoption credit for 2027, and Form 8839, the adoption credit.
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Answer againSources
- Internal Revenue Service, Rev. Proc. 2026-35, tax year 2027 inflation-adjusted items: www.irs.gov
- Internal Revenue Service, Rev. Proc. 2025-32, tax year 2026 inflation-adjusted amounts, as modified by the One, Big, Beautiful Bill Act: www.irs.gov
- 26 U.S.C. 137, Adoption assistance programs (U.S. Code, 2024 edition, U.S. Government Publishing Office): www.govinfo.gov
- Internal Revenue Service, Instructions for Form 8839 (2025), Qualified Adoption Expenses: www.irs.gov
Read from the primary documents linked above on November 5, 2026. General information, not tax advice. Your own facts decide the outcome, and a preparer or the IRS itself is the right place to confirm anything consequential.