Foster Parenting, Adoption and Tax Season

Have you brought a foster child into your home? If so, you know the rewards―and the expenses―that come with raising a child. The federal government offers a variety of potential tax benefits to foster parents, just as they do for all parents.

With the 2021 tax season filing deadline approaching, here are things you should know about foster care and taxes and how specific things may apply to you and your family, as well as how to determine if you qualify.

Note: 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.

Whether you’ve been doing your own taxes for years or have someone running the numbers for you, tax season can be an extremely stressful time.  Little mistakes can turn into lower refunds or higher tax bills.  In addition, the past couple of years have brought federal stimulus checks and additional child tax credits just to name a few but being a foster parent on top of all that can create many nuances indeed!  It is important to speak with a tax professional before filing your taxes to ensure your documents are filed correctly, especially when claiming a foster youth.

One of the most frequently asked questions we hear during tax time is “Can I claim my foster youth as a dependent?”  The answer is….It depends.

CAN I CLAIM MY FOSTER/ADOPTED CHILD ON MY TAX RETURN?

For tax purposes, a foster parent is someone who has had a child placed in their home by either a court order, judgment or authorized placement agency. The child therefore must be placed in your home by a government entity such as a County Children Services Agency/ Department of Job and Family Services Agency, or by a private child placing agency such as Kids Count Too, Inc.  Taking a family member or a neighbor’s child in, even for an extended period of time, does not make someone a foster parent in the eyes of the IRS.

If you qualify as a foster parent, you may be able to claim your foster child as a dependent on your tax return.  To qualify as a dependent, a foster youth must meet these basic IRS guidelines:

• The child is under age 19 (or 24 if they're a full-time student) by the end of the year.
• The child is younger than you and your spouse, if you're married and filing jointly.
• The child has lived with you for more than half the year.
• The child did not provide more than half of his or her own support for the year.
• The child did not file a joint tax return for the year.
• The child is not claimed as a dependent on anyone else's tax return.

Claiming a foster child as your dependent doesn’t get you an additional deduction on your taxes; these personal exemptions were eliminated as part of the Tax Cuts and Jobs Act in 2017.  If you are single, however, having a dependent may enable you to file as Head of Household, which offers a higher standard deduction, and may help you qualify for a range of tax benefits such as those listed below.

TAX BENEFITS AVAILABLE TO FOSTER PARENTS

Some significant tax benefits may be available to you as a foster parent, though it's important to check guidelines for each to make sure you qualify. Here's a quick list of potential tax benefits:

1. NON-TAXABLE FOSTER CARE PAYMENTS

Whether you receive payments for caring for foster children from the government or a child placement agency, these payments are not taxable and do not need to be reported on your tax return.

2. CHILD TAX CREDITS

Child tax credits—including 2021 expanded credits of up to $3,600 under the American Rescue Plan Act—may be available. To qualify for expanded child tax credits, a foster child must have been under 18 at the end of 2021, claimed as a dependent on your tax return and meet other IRS requirements. Foster parents must also adhere to maximum income requirements. Foster families who don't qualify for expanded child tax credits may be eligible for regular or advanced child tax credits of up to $3,000 per qualifying child.

3. RECOVERY REBATE (STIMULUS) CREDIT

If your dependent foster child qualified you for a stimulus payment in 2021 but you haven't received payment for this, you might qualify for a Recovery Rebate Credit, which means you can claim the missing amount on your 2021 tax return.

4. CHILD AND DEPENDENT CARE CREDITS

At the federal level foster parents may also qualify for the Child and Dependent Care Credit. For the tax year 2021 the child and dependent care tax credit is $8,000 for one child and $16,000 for two or more. Please click on this link to learn more about the Child and Dependent Care Credit for 2021 from the IRS website.

5. EARNED INCOME TAX CREDIT

An eligible foster child may help you qualify for the earned income tax credit, which offers relief to low- and moderate-income working people in the form of refundable tax credits. Adding a dependent child generally qualifies you for a larger credit.

6. AMERICAN OPPORTUNITY TAX CREDIT

The American Opportunity Tax Credit provides tax breaks to help cover expenses during the first four years of post-secondary education. If your foster child qualifies and you meet income guidelines, you may be eligible for up to $2,500 in tax credits.

7. DEDUCTIBLE EXPENSES

Some of your foster care expenses may be deductible on your taxes as charitable donations if you itemize your deductions and if the agency that provides support is a qualified charity. If you receive foster care payments from a government agency, this deduction is not for you. These expenses must go toward basic support—food, clothing and care. Any unreimbursed expenses that aren't tax deductible can be used to help meet the requirements of claiming your foster child as a dependent.

ADOPTIONS

Adopted and foster children are treated the same as biological dependents for tax purposes.  Adoptive parents are able to claim an adopted child for the tax year that the adoption was legally finalized in.  For adoptions that were finalized in 2021, there is a federal adoption tax credit of up to $14,400 per child.  This tax credit is not refundable, which means that you are only able to use the credit if you have the federal income tax liability to offset it.  To be eligible for the adoption credit, the parents must:

1. Have adopted a child other than a stepchild – and the child must be either under 18 or be physically or mentally unable to take care of him or herself and
2. Be within the income limits. Income affects how much of the credit parents can claim.  In 2021, families with a modified adjusted gross income below $216,660 can claim full credit.  Those with incomes from $216,660 to $256,660 can claim partial credit and those with incomes above $256,660 cannot claim the credit.  Please click on the following link for more information on the Federal Adoption Credit for 2021.

OTHERS MAY TRY TO CLAIM YOUR FOSTER OR ADOPTED CHILDREN

Unfortunately, claiming your foster or adopted child on your taxes is not always a smooth process.  It is always possible to file your return and then have it rejected because someone else has filed their return and claimed the child.  Realistically, anyone who has access to the child’s social security number, such as biological parents, grandparents or any other relatives, may attempt to claim them on their own taxes.  If this should happen, then you would need to file an appeal showing proof that the dependent did, in fact, live with you for more than six months out of the year.  Again, always ask the tax experts on this if you have additional questions.

**As stated previously, 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.