US Tax Benefits Related to Adoption & Foster Care
As an adoptive parent or person who does foster care, the good news is that you’re eligible for various tax benefits.
Points that you’ll need to understand to claim these tax breaks include charitable deductions for foster parents; credit for adoption expenses; taxable and non-taxable subsidies; claiming a child as a dependent and claiming the child tax credit.
This guide will help adoptive parents and foster parents to complete their online tax preparation by exploring the above points.
Charitable Deductions for Foster Parents
Foster parents who are not running a foster care business or otherwise making a profit from foster work may be able to deduct some of the costs involved with caretaking. For example, if you spend your own money to provide school clothes and supplies to a foster child, you can be reimbursed for this through your federal tax return. Use Schedule A to itemize such deductions.
You cannot claim deductions as charitable if you list the child as a dependent however.
Credit for Adoption Expenses
You may be able to claim a refundable tax credit for expenses involved with adopting a child during 2010 and 2011. Examples of these eligible expenses include adoption fees, attorney fees and travel expenses. Additional benefits apply to those who adopt children with special needs. Adoption expense limits are $13,360 for the 2011 tax year and $13,170 for 2010.
In 2012, the tax credit for adoptive parents is $12,650 and will not be refundable. That is, instead of being able to cash out any excess credit, parents will return to the pre-2010 system of rolling over their unused credits to defray tax payments the next year.
To request an adoption expense credit, complete IRS Form 8839,titled ‘Qualified Adoption Expenses’, and attach it to your usual 1040 or 1040NR. Since adoption expenses are complex and may involve a great deal of money, it’s advisable to seek personalized tax assistance when completing the form.
Adoption Subsidies, Foster Care Subsidies and Taxable Income
Adoptive parents and foster parents generally don’t need to include assistance funds in their taxable income. IRS Publication 17 states that TANF (Temporary Assistance for Needy Families), food stamps and other payments are considered public welfare funds and are therefore exempt from taxation. Here are some exceptions:
· If a portion of the assistance funds aren’t actually used to support the child involved, it’s considered taxable income. This situation can arise if the adoptive or foster family has no additional sources of income.
· Foster parents who receive income to care for more than five individuals aged 19 or older must report any payments received for providing care.
· If a person operates a group foster home or cares for more than ten children, is paid for his or her work, or is paid to keep a bed available even though it’s unoccupied, then payments may be considered taxable. People in these situations should ideally seek personalized tax advice.
Claiming Your Child as a Dependent
You can claim a child as a dependent when all four of these conditions are met:
1) Relationship: the child is your biological child, a stepchild, your adopted child, your foster child, your sibling or a descendant of someone in these categories (e.g. a grandson or niece).
2) Residency: the child has lived with you for at least six months of the calendar year. The time a child spends at boarding school, traveling or in juvenile detention may also be considered time spent in your care. Still, this criterion is more stringent than it used to be – prior to 2005, you could claim a foster child as a dependent even if they were placed with you in December.
3) Support: unless the child provides for more than half of his or her support (e.g., through employment), then adoptive parents and foster parents are considered to provide support. Assistance benefits from the state are not considered part of the child’s contribution.
4) Age: if the child is age 19 or younger at the end of the year, then you can claim him or her as a dependent. If the child is a full-time student, the limit is 24 years. A person with a disability may be claimed as a dependent at any age.
Adopted Children and the Child Tax Credit
If you can claim a child aged 16 or younger as a dependent, then you can probably claim the child tax credit too. The most you can claim with this credit per child is $1000.
If you’re also claiming the adoption tax credit, then you’ll need to complete a sheet from IRS Publication 972 to compute your specific child tax credit.
If you’re not claiming the adoption tax credit, you can just use line 6c of the 1040 or 1040A, or line 7 of the 1040NR.
Conclusion
Whether you use the traditional mail route or get help using online tax preparation, providing foster care or adopting a child can be complicated. Parents and other caregivers are advised to educate themselves about the tax benefits that can help them with the costs of raising a child, and if you’re in any doubt as to what you’re eligible for, you can always meet with a tax professional to help you navigate the system.
About the Author:Bob Goren is an accountant and independent advisor about online tax preparation in the US.
Processing your request, Please wait....
