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FAQs on Foster Family Taxes
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FAQs on Foster Family Taxes

Are my foster-care payments exempt from taxes? Can I take the dependent exemption?

According to the Casey Family Programs, on any given day there are more than 500,000 children living in foster care nationwide. There are a lot of Americans serving as foster parents. If you are a foster family, you face all of the tax issues that face other families, but you also have to grapple with some issues that are unique to foster families.


Are Foster-Care Payments Tax Exempt?

Yes, according to Internal Revenue Code section 131. If you are providing foster care and receive qualified foster-care payments, you do not need to list them as part of your gross income. So they are, in effect, exempt from income tax. However, you must include in income payments received for more than five qualified foster individuals who are 19 or older and difficulty-of-care payments received for more than ten qualified foster individuals under age 19 or more than five age 19 or older.

More foster care payments can be excluded from your taxable income under a recently-passed law. The law now:

  • Includes foster care payments made to you by any placement agency licensed or certified by your state or local government or any entity designated by that state or local government to make such payments. (Previously the payments had to be from the government itself or from a tax-exempt placement agency in order to be tax-free.)
  • More individuals are considered "foster care individuals", a definition which includes individuals placed by a qualified foster care placement agency regardless of whether the individual is under 19 at the time of placement. (Previously the age 19 requirement applied in order for the payments to be tax-free.)

What is a Qualified Foster-Care Payment?

A payment for foster care is a qualified foster-care payment if:

  1. The payment is made by:
    1. a state or political subdivision of a state, or
    2. a qualified foster care placement agency (see below); and
  2. The payment must be either:
    1. paid to you for caring for a qualified foster individual in your "home"; or
    2. paid as a difficulty-of-care payment.

There are some specific exceptions based on the number of foster individuals and type of care provided, but, generally payments you receive as a foster care provider will be excluded from taxable income and are not reported on your tax return. These excluded payments include:

  • Reimbursements for the cost of care
  • Payments for specialized care or difficulty of care
  • Most other reimbursements from government or charitable welfare agencies
  • Child-only cash assistance
  • Food stamps

The welfare agency making payments to you should be able to verify for you that the payments that you receive are excluded from taxable income. If you do receive other taxable income, any directly related expenses (and some indirect expenses, such as the cost of maintaining your home) may be deductible against that income.


Who is a Foster Individual?

A qualified foster individual who is living in a foster family home in which the individual was placed by:

  • an agency of a state or political subdivision of the state, or
  • a qualified foster care placement agency (generally, a placement agency licensed or certified by a state or political subdivision under its foster care program)

What are Difficulty of Care Payments?

Difficulty-of-Care Payments are additional payments which are designated by the payor as compensation for providing the additional care of a qualified foster individual required by reason of a physical, mental, or emotional handicap with respect to which the state has determined that there is a need for additional compensation and the additional care is provided in the home of the foster care provider.


Can I Take the Dependent Exemption for a Foster Child?

Yes, if the child qualifies as a foster child, you can claim a dependent deduction of $3,100 in 2004. To qualify as a dependent, the child must be a member of your household, if placed with you by an authorized placement agency for legal adoption or foster care by you, who lives in your home during the entire year, and is a member of your household.

The child must be a U.S. citizen or resident, and your income must be within certain limits to receive benefit for the dependency exemption, as described in The Personal and Dependent Exemptions.


Can You Cite the IRS Code on That?

Under Internal Revenue Code section 152, in order to be a dependent, a person must meet certain relationship requirements. Subsection 152(a)(9) requires that an individual being claimed as a dependent has a principal place of abode at the taxpayer's home and is a member of the taxpayer's household. Section 152(b)(2) states:

"...a legally adopted child of an individual (and a child who is a member of an individual's household, if placed with such individual by an authorized placement agency for legal adoption by such individual), or a foster child of an individual (if such child satisfies the requirements of subsection (a)(9) with respect to such individual), shall be treated as a child of such individual by blood."

For more information on the dependency exemption, see IRS publication 501: Exemptions, Standard Deduction, and Filing Information.


Can I Deduct Unreimbursed Expenses as Charitable Contributions?

If you incur unreimbursed, out of pocket expenses as a foster care provider for a child placed by a government or a charitable organization, you may be able to claim those expenses as charitable contributions (as long as you have not assumed legal responsibility for the care of the child and have no profit motive in providing foster care). Examples of unreimbursed expenses include:

  • Child care expenses
  • Clothing
  • Entertainment
  • Equipment (such as a car seat or crib)
  • Furniture used by the foster child
  • Home repairs for damages caused by the foster child
  • Medical costs
  • Music lessons
  • Tutoring

For more information on charitable contributions, see IRS Publication 526: Charitable Contributions.


Are There Other Deductions We Can Take, as a Family?

Yes, if your foster child qualifies as a dependent (and in some cases even if the child does not qualify), there are a number of deductions and credits that apply to families. These are beyond the scope of this article, but should be considered when planning for taxes or preparing your tax return. Some of these credits, deductions, and exemptions are described in the following articles.


Where Can We Find Out More?

For additional information, read the following IRS publications, which are available from the IRS in print form or on the IRS website.


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