Foster Care and Taxes: What You Need to Know
With the 2021 tax season filing deadline approaching, here are three things you should know about foster care and taxes.
Note: This article should not be construed as legal advice. The purpose of this article is to provide general guidance. For any specific questions on your tax return, please contact a licensed attorney or other certified tax expert. Any information provided may not be construed as the giving of legal advice to any person about a particular legal matter and should not be relied upon as the basis for taking a particular action or refraining from taking a particular action in any legal matter.
1) Foster Parents Can Claim Foster Children On Their Taxes – But Note The Fine Print
Both nationally and specifically in California, foster children can be viewed as the same as biological children – at least for tax purposes. As H&R Block has noted, “You can claim a foster child dependent or adopted child dependent if the child was placed with you by one of these:
- An authorized placement agency
- Judgment, decree, or other court order
You can claim an adopted child if the adoption has been legally finalized.
Adopted and foster children are treated the same as biological dependents for tax purposes.
Here, an authorized placement agency can refer to either a government agency such as a county social services department or an authorized foster care agency like Alternative Family Services.
At the national level, the U.S. Internal Revenue Service has noted that a foster child may be considered a qualifying child – at least for tax year 2021. To see if you are eligible for the Advance Child Tax Credit or the Earned Income Tax Credit, head here: https://www.irs.gov/credits-deductions-for-individuals.
With the IRS, the qualifying child must:
- be a child under the age of 18
- must have resided with the person or people claiming them for at least half of the calendar year
Further, the IRS stipulates that filing status is also a key consideration in order to claim the credit, as the “individual does not file a joint return with the individual’s spouse for tax year 2021 or files it only to claim a refund of withheld income tax or estimated tax paid.”
At the federal level, certain resource parents may also qualify for the Child and Dependent Care Credit. Follow this link to learn more: https://www.irs.gov/newsroom/child-and-dependent-care-credit-faqs.
Additionally, at the state level, the State of California Franchise Tax Board notes that resource parents can qualify specifically for the Child and Dependent Care Expenses Credit. This credit can cover some foster care expenses so long as “you paid someone to take care of” the foster youth in your care and you earned income. To qualify for this particular state-level credit, the foster child needs to meet the following criteria:
- Age: Are under 13 years old
- Residency: Lived with you for more than 1/2 the year
- Support: Did not provide more than 1/2 of his/her own support
- Joint Return: Did not file a joint federal or state income tax return
- Citizenship: Are a U.S. citizen, national, or resident of Canada or Mexico
It is important to note that states may define dependents differently than the IRS. For example, in relation to age, the State of California Franchise Tax Board says that qualifying children “must be younger than the taxpayer and either a) under the age of 19 at the end of the tax year, or b) under the age of 24 if a full-time student for at least 5 months of the year. A permanently and totally disabled child may be included at any age.”
Note that the above definition is specifically for the California Earned Income Tax Credit and/or Young Child Tax Credit. To learn more about these credits, head to https://www.ftb.ca.gov/file/personal/credits/california-earned-income-tax-credit.html.
What about when a foster child lives with multiple families in a given year? The State of California Franchise Tax Board has noted that, “The child only qualifies for one return. If the child can be claimed by more than one taxpayer, the child’s qualification goes to the taxpayer who is the child’s parent. If more than one taxpayer is the child’s parent, the child’s qualification goes to the parent with whom the child lived for the greatest amount of time during the year. If the child’s time was split equally between parents, the child’s qualification goes to the parent with the highest adjusted gross income (AGI). If no taxpayer is the child’s parent, the child’s qualification goes to the taxpayer with the highest AGI.”
In order to claim a foster child on your taxes, however, you will need to have their Social Security number or Individual Taxpayer Identification Number (ITIN).
2) How To Think About Foster Care Payments
According to the website eFile.com, resource parents who itemize deductions “may be able to deduct foster care expenses as a charitable donation if they are unreimbursed. The expenses must be out-of-pocket and used to clothe, feed, and care for the foster child. However, this only applies if the organization or agency who placed the child with you can receive charitable donations.”
Further, “any foster care payments you receive from a child placement agency, the state government, or your local government are considered nontaxable income. The money is for the support of the foster child and isn’t just going into your pocket, the way other income would. You don’t have to report support payments on your taxes,” according to 1040.com.
3) Charitable Donations To Foster Care Agencies Are Tax Deductible
Many foster care agencies are registered nonprofits, and therefore any donations made to them may be tax deductible. With registered nonprofits, donations of money, services and physical items may be tax deductible. For any specific questions, be sure to discuss details with the organization in kind you are considering donating to or that you have already donated to in the past year.
Please note that this article was written in 2022, with information primarily on the 2021 tax year. State and federal laws and guidelines change, so please note that some of this information may become outdated over time.