Being a foster parent is a selfless act that can have a profound impact on the life of a child in need. However, it's important to understand the tax implications of being a foster parent, as it can have an impact on your finances.
We’ve created an overview of how being a foster parent can affect your taxes. For example, you may be eligible for tax credits and deductions. These can help offset some of the expenses you incur while caring for a foster child.
Taxes are a serious matter, and this is a helpful guide that can prompt you to look for potential opportunities to save money and file your taxes more accurately. We recommend speaking with a tax professional or using a software with support to double-check that your situation applies to the following deductions and credits.
Claiming Your Foster Child
When it comes to claiming dependents, you can support a child financially, but they may not live with you. On the other hand, a dependent may live with you, but you don’t provide for them in any other way.
In order to claim your foster child as a dependent, you must have provided at least half of their support in the previous year, and they also need to have been in your care for over 6 months. Only one caretaker can claim the foster child on their taxes per year.
Deductions and Credits
1. Deductible expenses
As a foster parent, you may be able to deduct certain expenses related to the care of the child, such as food, clothing, and medical expenses that aren’t covered by the state stipend. However, it's important to keep detailed records and receipts to ensure that you can support these deductions if you are audited by the IRS.
Some people feel conflicted about reporting money they spent to help a child in need. There is no requirement to report extra expenses, so if you feel more comfortable, you don’t need to include them in your tax filing.
2. Child tax credit
If you are claiming a foster child as a dependent on your tax return, you may be eligible for the child tax credit. This credit can reduce your tax liability by up to $2,000 per child. In 2022, if the foster child lived with you for more than 50% of the year, you could claim them for this credit without having provided 50% of their support.
3. Dependent care credit
If you pay for childcare while you work or look for work, you may be eligible for the dependent care credit. This credit can help offset some of the costs of childcare for foster children. Depending on your circumstances, you can declare 20% to 35% of your childcare expenses.
4. Taxable income
As a foster parent, the stipend you receive from the government or a foster care agency for the care of a foster child is not considered taxable income.
5. Earned Income Tax Credit
Being a foster parent can have an impact on your Earned Income Tax Credit (EITC) eligibility and the amount of credit you receive. In general, foster care payments are not considered taxable income and are therefore not included in your EITC calculation.
However, if you receive other taxable income, such as wages or self-employment income, your foster care payments could impact your EITC eligibility and credit amount. This is because the amount of EITC you can claim depends on your earned income and the number of qualifying children you have.
6. Adoption tax credit
If you decide to adopt a foster child, you may be eligible for the adoption tax credit. This credit can help offset the costs associated with adoption, including legal fees and court costs.
Finances are a Part of Foster Care
It's important to note that the tax laws surrounding foster care can be complex, and it's a good idea to consult with a tax professional or accountant to ensure that you are taking advantage of all of the credits and deductions that you are eligible for. Your foster care agency may also be able to direct you to resources.
Being a foster parent can be a rewarding experience, and it's important to understand the tax implications of caring for a foster child. By staying informed and using your resources, you can ensure that you are taking advantage of all of the tax credits and deductions that you are eligible for, and that you are accurately reporting your taxable income this tax season.
At our agency, we're committed to supporting you in every aspect of being a foster parent - whether it's simply answering your questions or guiding you through the tax-filing process. If you've ever felt the desire to make a difference in a child's life through fostering, we encourage you to get in touch with us. You can also get some of your foster care questions answered in our free ebook linked below.