Foster Care, Adoption, and Tax Considerations.
I’m a CPA and a Foster parent. These two roles don’t have a lot in common, but it does give me a unique perspective. My wife and I began our foster care journey in 2015 and now have the opportunity to adopt two beautiful, amazing children. Through the process, as a CPA, I asked questions most foster parents probably won’t think of and I wanted to share some of my findings here.
Are Foster Care payments Taxable?
In most cases foster care payments or substudies are not taxable (see IRS Sec 131). They are excluded from income if:
- The payment is received from a state or political subdivision (essentially private, but funded by the state) foster care program
- The individual receiving the payment is living in the home wherein the foster child resides and the child was placed there by the foster care program
Can you claim a Foster Child as a Dependent on your taxes?
I was surprised to find that, yes, you can. There are some qualifications, but the main two are:
- The child lived with you for more than six month
- You or the child provided for more than half of their support (housing, food, transportation, and medical).
If the child lived in your house for more than 6 months and you provided more than half of their support, then you should be able to claim them as a dependent (see IRS Publication 17).
What if someone already claimed them as a dependent?
If you are planning on e-filing with a foster child claimed on your return, then it may be rejected if someone else has already claimed them. However, that doesn’t mean you can’t claim them. It means you will have to print the tax return and file by mailing it in. I would also recommend including a supporting schedule from your foster care agency listing the details that, yes, you received the child into your care on this specific date. This will cause issues for the individual who originally claimed the child, but they may have fraudulently claimed them. I would suggest discussing this with your foster care worker and possibly filing a form, the 3949-A Form, if your know of the individual who may have claimed the child.
What about Adoption Expenses?
When you adopt a child out of foster care adoption expenses are often times covered. But if you chose to adopt a child outside of foster care or the costs aren’t covered there are a couple of things to consider. Is this a domestic adoption or international? :
- For a domestic adoption, adoption expenses are deductible as a credit in the year after payment unless it is in the year of finalization. In the year of finalization, the expenses are deductible that tax-year. The credit is non-refundable and can be carried forward five years. Another thing to note is that adoption expenses for domestic adoptions are deductible even if the adoption is never finalized.
- For international adoptions, adoption expenses are deductible in the year of finalization. They are also non-refundable and carry forward five years. This means adoption expenses related to an adoption which is never finalized may not be deductible.
- Lastly, the cap for adoption expense for 2016 was $13,460 per child. (see IRS Tax Topic) This cap can change each year.
As a CPA, foster parent, and soon to be adoptive parent, I hope that the above information is helpful. If you feel it is too complex to figure out on your own feel free to contact Walston Advisory Firm at:
Phone: (434) 515-1669.