As the year-end tax deadline approaches each year, Individuals and couples who provide foster care to children often face questions about whether and to what extent their foster care work impacts their tax obligations. The payments foster care parents receive for their services, funded by the Children’s Bureau of the U.S. Administration for Children and Families, is intended to provide assistance with the child’s needs, not as compensation for the foster parents who are volunteering their services. Because it is not deemed income, it generally does not need to be reported as such for tax purposes, although there may be certain circumstances where a portion of foster care subsidies may be taxable.[i] For example, foster parents who receive payments for maintaining space in their homes to provide emergency foster care services must treat such payments as income under IRS rules.[ii]
Claiming Foster Children as Dependents
If you are a foster parent, you may be able to claim foster children as dependents. The Internal Revenue Code (IRC) provides a framework for determining dependent eligibility. However, the child’s parents have the first right to claim the child as a dependent; a foster parent may only do so if the child meets the criteria specified in the IRC and if the child is not claimed as a tax dependent by his or her parent(s). The IRC criteria for potential dependents include the following[iii]:
- They must have been placed with you by judgment, court order, or an authorized state or local government placement organization;
- They must be under age 19, disabled (of any age), or under age 24 and a full-time student;
- They must be younger than the foster parent(s) seeking to claim the dependent deduction; and
- They must live in the foster parents’ home for more than one-half of the tax year.
Understanding Potential Tax Credits and Deductions
Foster parents may also be able to take tax deductions for expenses incurred in providing foster care services and claim valuable tax credits.[iv]
First, foster parents who incur unreimbursed expenses to feed, clothe, and care for foster children may be able to claim those expenses as tax-deductible charitable donations, if the foster care organization or agency that placed the child with you is able to receive charitable donations. In the event the agency or organization cannot accept charitable donations, you may still be able to deduct expenses as support expenses.[v]
Depending on their circumstances, parents who foster children may be able to claim credits including the Child Tax Credit, Additional Child Tax Credit, Child and Dependent Care Credit, and Earned Income Tax Credit.[vi] When the foster child is an eligible dependent, the foster parents may also be able to claim the American Opportunity Tax Credit.[vii] And, foster parents who decide to adopt children from the foster care system may be eligible to claim a one-time, per-child Federal Adoption Tax Credit.[viii]
Seek Professional Guidance Specific to Your Situation
The tax landscape for foster parents depends on a variety of circumstances, including whether the child is considered an eligible dependent, the foster parents’ eligibility for various tax credits, and more.[ix] To understand how your foster care activities may impact your tax bill, talk to your financial and tax professionals.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.