In most cases, your foster care income is not taxable as long as you meet the requirements. There are some exceptions, though.
What qualifies as foster care?
Foster care is an official placement by a court or government agency that oversees foster care in your area. Taking in a friend or family member’s child without going through the official foster care process generally does not count as foster care.
If you agree to take in someone’s child outside of the foster care process, you may be able to claim that child as a dependent even if you don’t qualify for foster care tax treatment.
Do you pay taxes on foster care income?
You generally don’t have to pay taxes on foster care income. There are special tax rules that exclude this income.
There is one exception where if you receive compensation for leaving space in your home open for emergency foster care, that compensation is usually taxable. That’s because foster care payments are usually excludable because they’re considered support for the child, but you don’t have a child living with you at that time.
Grandparents and other family members who take in a child from their own family also qualify to exclude foster care payments from their income as long as they go through the formal foster care process.
What other tax breaks can foster parents qualify for?
If you have a foster child, you may qualify for the following tax benefits. The usual rules, such as age and living with you for more than half of the year, usually apply.
- Claiming a foster child as your dependent
- Counting foster care expenses as a deductible charitable contribution if the organization who placed the child with you is a qualified charitable organization (because you paying these expenses out-of-pocket is the same as you donating to the charity then them paying for the expenses).
- Child Tax Credit
- Child and Dependent Care Credit
- Earned Income Tax Credit (by counting the foster child as a qualifying dependent)
- Education tax credits such as the American Opportunity Tax Credit or Lifetime Learning Credit
- Medical and dental expenses deduction
- Adoption Tax Credit (if you choose to adopt)
- Similar state tax credits and deductions if you live in a state with state income taxes
In most cases, you can’t double dip. For example, if you receive tax-free payments for expenses, you can’t claim those expenses as expenses you paid to receive another tax credit. You can generally only claim expenses you weren’t reimbursed for.
Your tax filing software should walk you through everything you need to check to see what tax benefits you qualify for. Just make sure you’ve entered that you have a foster child and answer the questions accurately.
Some foster care agencies can help connect you with a free tax accountant if you have additional questions about foster care tax benefits.
How do I get a foster child’s Social Security Number?
If you claim a foster child on your taxes, the IRS will usually require you to have the child’s Social Security Number. You can get this information from the placement agency.
Most placement agencies are familiar with this requirement and will readily assist you.
What if someone else claimed your foster child?
If someone else claimed your foster child, it will work similarly to two divorced parents or other family members trying to claim the same child.
If the other person filed first and you try to file online, the IRS will reject your tax return. File your tax return by mail and include an explanation of why you’re entitled to claim that foster child.
If you filed online first or filed by mail, the IRS will send you a letter saying that two people claimed the same child. Send them an explanation of why you’re entitled to claim that foster child.
The IRS will also contact the other person and then review the responses and documentation. The IRS will then decide who had the right to claim the foster child.
Whoever was wrong will likely have to pay extra taxes and a penalty, so make sure you’ve carefully reviewed the requirements for claiming a foster child.
