Tax Issues for Foster Parents
Updated: Jan 14, 2019
There are many things in this world that we have to do on a regular basis. We have to wake up each morning, we have to go to work or school, we have to pay our bills and once each year we have to file our income taxes with the IRS and in Virginia the Virginia Department of Taxation. While for some this is a time to get a large refund and pay off bills, schedule a vacation or put a down payment on a new car for many other members of society it can be a scary, nerve-wracking, stress-filled nightmare. This is especially the case when something new pops up on our tax return that we haven’t had to deal with before. Then the dilemma becomes, do I continue attempting to prepare my return myself or do I enlist the services of a professional preparer.
When you are a Foster Parent, who do you turn to for help on your taxes?
This is a common dilemma for new foster parents. As potential foster parents they have gone through all of the certifications, trainings, background checks and home visits that that were required to finally at the end of the day get one, or two, or three or more children placed in their care. The excitement of becoming a foster parent can be dulled when tax times roles around the questions start coming out. Do I get to claim my foster child? Do I have to claim the maintenance payments that I receive? Can I deduct any of the additional expenses above and beyond the maintenance payments? Are there any other tax benefits for foster parents?
Generally the first place foster parents will go is to other foster parents. These experienced foster parents have obviously filed their taxes before and they should know these things, but this is a lot like asking the office “tax expert” for advice around the water cooler. Depending on how many different people you ask you will get that many different answers to your question. The next place many foster parents will seek this information is the placement agency. The agency should know what foster parents can and can’t claim on their taxes because they work with foster parents day in and day out. This may be a more satisfactory stop than other foster parents but their still could be pieces left out.
The best place for new foster parents to go to find out the answers to these questions is an accountant who specializes in preparing individual tax returns such as Practical Accounting Solutions in Fredericksburg, VA. These professionals deal with complex tax situations such as claiming a new foster child on your tax return on a daily basis and have the training and knowledge to be able to answer a foster parent’s questions about their new tax situation and how it will impact them not only now, but into the future.
Another benefit of utilizing a tax professional is that they can provide advice on ways to improve your tax situation or potentially qualify you for deductions or credits that you weren’t aware that you qualified for. This can sometimes pay their fee many times over. As far as the common questions that were asked above, here are the answers to each of those. The thing to realize is that every foster parent’s situation is slightly different and it is best to consult a professional to ensure that you are claiming only the items on your tax return that are necessary.
Common Foster Care Tax Questions
Do I get to claim my foster child?
Generally, yes. There are many pieces that factor into who gets to claim another person on their tax return as a dependent. To file for a foster child:
You must produce a court order or an order from an authorized placement agency.
The child in foster care must be under 19 or under 24 and a full-time student.
The child in foster care must be a US Citizen, National, Resident Alien or a Resident of Canada or Mexico.
They must have a Social Security Number or an Individual Taxpayer Identification Number.
In many cases, they must have lived with you for more than 6 months except for temporary absences
Do I have to claim the maintenance payments that I receive?
Your maintenance payments are not taxable as income so you do not have to report them on your tax return.
Can I deduct any of the additional expenses above and beyond the maintenance payments?
Unfortunately, you cannot. Just as you can’t deduct the cost of providing food, clothing and shelter for yourself and your other dependents you also cannot deduct the cost of items that you spend for your foster child that go above and beyond your maintenance payments.
Are there any other tax benefits for foster parents?
There are many additional tax benefits for foster parents. In addition to being able to claim the foster child as a dependent they can potentially qualify for the Child Tax Credit, the Earned Income Credit, the Child and Dependent Care Credit and the American Opportunity Credit.
If the foster parents have no other qualifying children they can use their foster child to qualify for Head of Household Filing status.
Foster parents can also deduct medical expenses paid for their foster child as an itemized deduction. On their Virginia tax return they qualify for a deduction of $1,000 per foster child which helps to reduce their taxable income.
Another step that many foster parents eventually end up taking is adopting their foster children to legally bring them into their family. This provides additional stability for the child and ensures that the foster parents and foster child will remain together as a family unit. The added benefit of going through the adoption process is that there is a Federal Adoption Tax Credit that is currently worth $13,570 per adopted child which is generally claimed in the year that the adoption is finalized.
To qualify for the credit the parent has to have eligible expenses which would include reasonable and necessary adoption fees, court costs and attorney fees, travel expenses (including meals and lodging), and other expenses directly related to the adoption of a child (i.e. background checks, fingerprinting fees, etc.). There are income limits to be able to claim some or all of the credit and the limit currently starts at $203,540 and ends at $243,540.
If the parent is not able to utilize their entire adoption tax credit in the year of the adoption they are able to carry it over for a maximum of five years. If in the fifth year the credit hasn’t been used up then any remaining credit will be lost.
About the Author Adam Knihtila is an accounting professional located in Fredericksburg, VA that has his clients as his number one responsibility and priority. Always looking for ways to assist his clients in tax planning strategies that benefit them in both the short term and long term. Adam many years experience realting to tax preparation, personal income tax returns, business tax returns (Partnerships, S-Corporations, C-Corporations and Non-Profits), sales & use tax, meals tax and lodging taxes to state and local agencies. Adam also has many years of experience with bookkeeping including general ledger data entry, accounts payable, accounts receivable, general ledger reconciliation and all other aspects of creating/reporting financial data, running weekly/bi-weekly/monthly payroll, direct deposit, benefit calculations, W2/1099 creation, creating/submitting 941s, as well as filing to both the Virginia Department of Taxation and the Virginia Employment Commission. When you contact Adam he won't treat you like just any other customer. He will treat you like you are his only customer. With the understanding that you are very busy with day to day activities or running a business, Adam will come to you!
Practical Accounting Solutions was founded in November 2014, to provide the highest level of accounting service in the Fredericksburg region. We take a practical view of the needs of individuals and small business owners, and their needs and wants of accounting professionals. The professionals of Practical Accounting Solutions have many years of experience providing accounting services to individuals and businesses in the Fredericksburg region. This includes tax preparation, bookkeeping, payroll, business valuation, business start-up assistance, as well as tax planning. Our professionals want you to understand your finances and ways that you can improve your financial status on a short-term and long-term basis. Our primary mission is to maximize benefits to our clients by providing quality, personalized, and attentive accounting services. As your trusted adviser, our firm is dedicated to doing everything we can to improve your business practices and operations so you can relax and focus on what you do best: growing your business.