Welcome to tax season as a foster parent! You probably have a lot of questions like if you can claim your foster child as a dependent, what tax breaks are available to you, and who do you call for help?
This year is a particularly interesting one. We’ve had stimulus payments, employment has been inconsistent for many, and now we need to put it all together to do our civic duty and file taxes. Victor FFA is here to support you in every step of your foster care journey, and we want to give you some practical tips and general rules to be aware of so you can file with confidence!
Firstly, we want to encourage you to seek out the help of a professional tax preparer with your specific questions as every situation is unique. Be sure to ask questions if you have them.
Some Things to Consider
Last year we had federal stimulus payments, child tax credits, some state stimulus payments, and you may have had other payments that wouldn’t be in your finances during a ‘normal’ year. Putting foster parenting on top of that can easily feel a little overwhelming.
Combining foster parenting and finances may stir up some conflicting emotions. Is it right for me to claim this child as a dependent? “I’m doing something good by donating, do I need a tax break too?”
Choose what is best for you and your family. Here are some things to know about your taxes as a foster parent.
Claiming Your Foster Child as a Dependent
Before moving forward we need to make a clarification. A foster child may be a dependent, but not all dependents are foster children. A foster child is a young person who has been placed in your home by a state or agency. It cannot be someone you ‘foster’ personally. To gain foster care tax credits and breaks they must meet the recognized definition and the requirements we explain later.
Time and Care
When you claim your foster child as a dependent you must have provided at least half of their support in the last year. This is specifically care outside of what is provided by the agency or state who placed the child with you, for example shelter.
The foster child needs to have been in your care for more than six months of the year. So if your foster child was in your home for over 6 months in 2021, they are eligible to be claimed. As with most tax rules, there is some nuance to this one.
Only one Claim
Only one person can claim the child as a dependent for the year. So if someone else, a relative, previous foster parent, or really anyone with the child’s social security number, claims them on their taxes, your forms could be rejected. If that does happen you can file an appeal showing the child has been in your care for the past six months.
Filing Status
Claiming a foster child as a dependent can affect your filing status. If you claim a foster child as a dependent, you could qualify as Head of Household where you may not have otherwise been able to. If you are filing as Qualifying Widow(er) With Dependent Child you cannot claim a foster child as a dependent.
Claiming a Foster Child on Your Tax Return
Being specific about what counts as a foster child is so important because there are a lot of tax credits, breaks, and income adjustments that come with it. Furthermore, biological and adoptive children have different tax ramifications that are different from foster children and each other.
Earned Income Tax Credit
Yes your foster child does affect your Earned Income Credit amount as long as they also meet the requirements of qualifying as a dependent. Which means, you’ve supported at least half of their needs and they have lived with you 6 months of the year.
Child Tax Credit & Recovery Rebate Credit
Unique to 2022, foster children younger than 19 who lived with you for more than half the year can qualify you for the Child Tax Credit. The only qualifier is providing housing. This means you didn’t also have to provide over half their support. Claiming a foster child as a dependent may also boost the Recovery Rebate Credit. Again, if you have any questions, speak with a tax professional to make sure you are filing accurately and getting the most out of your taxes.
Income and Expenses
The primary tax break for foster parents is that any support payments from your placement agency will not count towards your taxable income. The logic behind this is that the money will be used for supporting your foster child ONLY, and not personal use like normal income would. The next tax break is one that can cause conflicting emotions.
You are allowed to deduct your unreimbursed foster care expenses as a charitable donation. So counting any out-of-pocket money you’ve put towards your foster child. You will need to keep track of those expenditures as itemized deductions. Some people feel conflicted about deducting expenses for taking care of a child in need, and we encourage you to choose what is best for your situation.
This is only an option for agencies and organizations that can receive charitable donations. If your organization can’t take donations, you can still count the expenses as further proof towards claiming the child as a dependent.
If you have adopted a child, which can happen in foster to adopt programs (like Victor FFA), you might qualify for the Adoption Tax Credit.
Silver Lining
Remember, you are learning new tax laws because you made the brave and loving choice to open your home to a child in need. Every penny accounted for is a symbol of time, energy, and care you gave to your foster child in the past year.
We care about helping you every aspect of being a foster parent. From answering your questions when you’re just curious to filing your taxes. If you have felt the tug to give more and become a foster parent, we invite you to reach out to us so we can speak with you.
