Providing Foster Care: Are There Deductions or Credits Available?

For many foster parents, tax time may be slightly confusing. This is because while you are responsible for the care and well-being of your foster children, the same credits and deductions that you receive with biological or adopted children may not apply. However, there are some tax breaks available to individuals who have become caregivers to the children in these situations. Working with your tax preparer or accountant, such as Kenneth in South Boston, VA, you can determine your eligibility for these tax breaks.

Defining a Foster Child

A foster child is a child that has been placed in your custody by a court order, judgement or through an authorized placement agency (state or local government organization). If none of these situations occurred, then you need to remember that may not be eligible to claim these foster care tax breaks. However, you may be able to claim the child as a dependent.

Now let’s take a look at the two tax breaks available to foster care parents and some of the benefits of these options

Foster Care Payments

While most income received by an individual taxpayer would be deemed taxable income, payments for the foster care of a child are not considered taxable income. The reasoning is that the money is being used in the care of the child, thus not going into your pocket for personal use as other income streams might.

Therefore, the government does not count these payments toward your gross income calculation for your income tax on your Federal return.

Expenses Related to Foster Care

For all other expenses incurred in caring for the child that are not reimbursed, you may be able to claim them as deductions on your income tax return. Using the charitable donation deduction, you can claim a deduction but only if the agency or organization that placed the child with you can accept such donations. Keep in mind, these charitable donations would have to meet the necessary requirements to qualify, so you will need to keep careful records and meet those required percentages. However, it is possible that you may be able to get a larger benefit from claiming your foster child as a dependent.

If those expenses cannot qualify as a charitable donation deduction, then you may be able to claim those unreimbursed expenses as support, which may then qualify the child as a dependent. If you provide at least half the support for the child and meet other necessary requirements, then you could possibility claim the child as a dependent.

When you add a child to your return, then you will need to use the foster child as the relationship designation. If you can meet the other qualifications, then you can receive the dependent credit. So what are the other necessary qualifications for a dependent?

Qualifications of a Dependent

Dependents are usually a child or relative of the taxpayer. All dependents must meet the basic requirements below:

• Dependents may have their own tax returns, but cannot have filed a joint return for the year, unless they were merely claiming a refund.
• They must be a U.S. citizen, U.S. national or a qualified resident alien.
• They must have a taxpayer identification number, which is defined as a Social Security number or Individual Taxpayer Identification Number (ITIN) or an Adoption Taxpayer Identification Number (ATIN).
• The dependent must have lived with you for at least half of the year.
• The child must be 18 or younger at the end of the tax year, or under 24 if they are a student.
• The potential dependent must also be younger than you or your spouse, except if the dependent is disabled.
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As you can see, there are several different scenarios that must be considered before you can claim a child as a dependent. However, by doing so, you may see a greater tax benefit at the end of the year.

If you are a foster care parent, it is important to keep track of all your expenses for the child, especially those that go above the amount of your monthly foster care payments. The reason is that these expenses may qualify you for a dependent deduction, especially if the agency or placement was from the courts and does not qualify for charitable deductions.

Click on the link below to contact a tax preparer or accountant at Kenneth M Perkins CPA/PFS in South Boston, VA, who can assist you in determining the best option for your unique circumstances of within the foster care system.