Thinking about adopting foster children? Fostering a child in need can be rewarding and it can also help you save on taxes. Depending on who placed the child in your home, the IRS may consider her your dependent and therefore an exemption for tax purposes. You usually don't have to pay income tax on the money the government pays you to care for her either.
You Can Claim Foster Kids
The IRS says foster kids are your dependents if a court order or an authorized agency, such as your state government or a foster agency, placed them in your home. In this case they're "qualifying children." Provided your situation meets a few additional requirements, you can claim them as dependent on your tax return.
Exceptions to Claiming Foster Kids
If the government or a foster agency compensates you for the basic expenses you incur caring for your foster child, such as food and shelter, this isn't income; it's support for the child. Therefore, you don't have to claim the payments on your tax return. However, a few exceptions exist. If you're caring for 10 or more kids or for children with special needs, this puts you in the business of fostering. The IRS views these payments as income, so you'll have to report it on Schedule C of your tax return. However, you can also deduct your business expenses from this income on Schedule C, so you probably won't pay income taxes on all the money you took in, just the difference between the income and your expenses.
State tax laws vary. Some states, like California, offer foster parents tax breaks that are similar to the IRS’s. Seven states don't collect income tax at all. They are Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Be sure to check your state’s tax laws or better yet, consult with a professional tax preparer.
Meeting 2018 Exemption Requirements
For the 2018 tax year your foster child must be younger than 19 to qualify as your dependent, or younger than 24 if she's a full-time student. Your age matters too. If you're not married, your foster child must be younger than you are. If you're 22, and your foster child is a 23-year-old college student, you can't claim her as a dependent. If you're married, your foster child must be younger than either you or your spouse, not both of you. There are no age restrictions if your foster child meets the IRS's criteria for being permanently and totally disabled at any time during the year.
Meeting 2017 Exemption Requirements
For the 2017 tax year, the same age requirements apply. Additionally for both 2017 and 2018, your foster child must have lived in your home for more than half of the year to qualify as your dependent. The payments you received from the government for fostering your child don't count as income, so you don't have to factor this in. However, if you have an older foster child who works, other criteria must be met to claim her as a dependent. She cannot have paid for more than half of her own support during the year and, for both 2017 and 2018 tax years, her total income cannot exceed $4,050.
Social Security Number Required
Unfortunately, you can only claim a child as your dependent if you know her Social Security number. You must include this on your tax return. These numbers are not always available to foster parents because of privacy concerns. Therefore, even if your foster kids meet all other IRS qualifications as your dependents, you still may not be able to claim them. However, this changes if you're in the process of adopting your foster child. You can apply to the IRS for an Adoption Taxpayer Identification number that you can use on your return in lieu of the child's Social Security number.
If you don’t claim a foster child as a dependent for lack of a Social Security number, and hope to file an amended form after she gets one, you’re still out of luck. The IRS requires that the child have a Social Security number on a tax return filed before April 15 for the previous calendar year.
- IRS: Publication 501 (2011) Exemptions, Standard Deduction and Filing Information
- IRS: Schedule C -- Profit or Loss From Business (PDF)
- Qualifying Child Rules
- IRS.gov: Instructions for Schedule C
- IRS.gov: Publication 929 Cat. No. 64349Y Tax Rules for Children and Dependents
- Nolo: Who Qualifies as a Dependent for Tax Purposes?
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