Posted by Tim Thompson CPA PLLC

Is Foster Income Taxable or Not?

Is Foster Income Taxable or Not?

Is Foster Income Taxed?

Payments received as Foster Income are NOT taxable, so you do not need to report them. Suppose the assistance is provided to a qualified foster individual and paid for by a state agency or qualified agency. In that case, foster care payment is NOT considered taxable income and is NOT included in your tax return. 

These payments include payments received from a local or state government or a qualified foster care agency.


Can I Claim a Foster Child on My Tax Return?

Yes, but on the condition that the child has lived with you for more than six months (6 months plus 1 day), an adopted child does not have to be at the adoptive parent's home at the end of the year to be claimed. It is important to note that only one person can claim the same child.

Adoptive parents can avoid problems with the IRS by filing the tax return as early as possible if the birth family is incorrectly claiming a child. The Internal Revenue S will immediately deny a claim if a child has already been claimed as a dependent. The second taxpayer will have to prove to the IRS that the child is in their care. Many adoptive parents who registered after their birth parents had already claimed the child as a dependent will have to go through this process.


Can I Qualify for EITC for Foster Kids?

Yes. You can now know the status of your application, your child's status as a qualified child, your credit eligibility, and you can estimate the amount of credit you can earn using the IRS EITC assistant.


What is the Adoption Tax Credit?

You can now obtain credit only for the amount paid in taxes, and you have five years to transfer any unused credit from previous years. The amount of the tax credit you are entitled is directly linked to the amount you spent on adoption costs.


What is the Cost of the Adoption Tax Credit?

The adoption tax credit for 2019 is $ 14,080, reducing your federal tax debt over the next five years. For 2019, the adoption tax credit for eligible adoption expenses is $ 14,080 for each adopted child, whether via domestic private adoption, public foster care, or international adoption. The adoption tax credit applies only to federal income taxes, NOT to state income taxes.


How does the Adoption Credit Work?

The credit can only be applied to what you owe in taxes; it is impossible to apply the total amount of $14,080. For example, if you paid $5,000 in federal income tax, but owed only $ 3,000 in tax, your income tax refund would normally be $2,000. However, by using the adoption tax credit, you can claim the debt of $ 2,000 and receive a tax refund of $ 5,000.

What if we don't owe $ 14,080 in taxes for 2019? The IRS allows you to apply your tax credit balance of $ 14,080 for five years. Continuing with the previous example, during the next fiscal year 2020, you can renew the remaining amount of the adoption tax credit. ($ 14,080 - $ 2,000 = $ 12,080) means you can apply $ 12,080 to what you owe in taxes from 2020 to the fiscal year 2023.


What are the costs of a Qualified Adoption?

Qualified adoption costs include reasonable and necessary adoption costs, court costs, legal costs, travel costs (including amounts spent on meals and accommodation outside the home), and other directly related expenses whose main purpose is adopting a child.

The expenses eligible for adoption are authorized by the adoption tax credit and include all expenses required for the adoption. Examples of qualified expenses are home study, court fees, attorney fees, medical exams/physicals, travel expenses (food, accommodation, airline, gasoline), agency fees, administrative fees, and any other costs directly related to the adoption. Domestic adoption fees that are not yet final can be done one year after the fee is paid, or you can wait until the adoption is complete.


How Does The Adoption Tax Credit Work If We Adopt A Child With Special Needs?

By adopting an American child with special needs, you can claim the maximum amount of the credit for the year in which the adoption ends, even if you have not paid the eligible costs. 

If you foster a child with special needs through foster care, you may be eligible to apply for the full adoption credit, even if you have no expenses. Each state has a different criterion that qualifies a child as a "person with special needs." The declaration of special needs must come from the state, where the adoption was final. To be considered a special needs adoption, you must have signed an adoption "subsidy agreement" with the state. (Some states call it "Adoption Assistance Determination").


What Is Considered as Adoption For Special Needs?

A child is considered to have special adoption needs if all of the following conditions are met:

  • A State declares that the child cannot or must not be returned to the home of the parents (the child in foster care);

  • The state determines that the child is unlikely to be adopted unless assistance is provided to the adoptive family (parents receive a monthly allowance after adoption)

  • The child is a resident or citizen of the United States when the adoption effort began (not international adoptions);


What Form Of IRS Do We Apply For Adoption Tax Credit?

To claim an adoption or exclusion credit, please complete Form 8839, Eligible Adoption Expenses, and attach the form to Form 1040.



Tim Thompson CPA PLLC
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