Thursday, January 22, 2015

Foster Care And Your Tax Return

I start tax season overtime next week.    ............WHAT??   So of course I've had tax returns on the brain, including our own.  It's gonna be quite a bit different.  In figuring out how to navigate our own tax return now that foster care came into our life, I thought I'd provide some answers to the question "How does foster care factor into our tax return?"  First, you may want to revisit my post about the money side of foster care.  So, from a foster parent who also happens to be a CPA, here are some ways that foster care might affect (or not affect) your tax return.

Monthly Reimbursement Payments
These are nontaxable and do not need to be reported anywhere on your tax return.  It truly is considered a reimbursement from the State, not a paycheck or some form of income.

Daycare Subsidy
Also a nontaxable benefit.  Nowhere to be found on your tax return.

WIC Program

Dependency Exemption
This is slightly more involved, but if it applies to you, it can have a humongous effect on your tax return on its own and because the next two items kick in then too.    Did you know that if your situation meets certain criteria, you can claim the foster kids in your care on your tax return?  

Here are the general requirements for claiming a child as a dependent: 
1) they must be a qualifying child, which includes a child by birth, adoption or a qualifying foster child, meaning a child placed in your home through an approved agency, 
2) lives in your home for more than half the year, 
3) they must not have provided over one half of their own financial support, 
4) they must be under the age of 19, or 24 if a student.

If your situation meets all those criteria, you can claim your foster kids on your tax return as your own dependents.  It doesn't matter if you intend to adopt them or not.  This triggers the dependency exemption and the next couple items below.  

I'd recommend talking about this with your kids' caseworker since it might produce an iffy situation if not handled with some awareness.  Our situation is very clear that we can claim our kids since we had them 11 months out of last year but some other situations may be more borderline and the biological parents may not realize that if the foster parents meet the criteria to claim the child, they themselves do not and legally should not claim the child.  If both sets of parents file a return with that child listed, whoever filed first will get the dependency exemption and the other will get an IRS notice saying someone else claimed the child and telling them to send back some of that refund you likely already got and spent.   Yipes.  The truth is, a lot of parents that are involved with CPS have bigger fish to fry than duking it out over who gets to claim their kid on a tax return and honestly, a lot of them may just not even file a tax return.  I didn't want to bank on that though and end up causing trouble for our kids' mom if we claimed the kids, then she tried to and ended up with a mess.  We talked to our kids' caseworker about it and decided that she would simply tell their mom "You are not legally allowed to claim the kids on your tax return if you are filing one" and leave it at that.  She won't necessarily know that we intend to, there's no chance of that knowledge creating malicious intentions to "get to the kids first" in tax return world, etc.  You just never know in these situations.  Simply looking at which family housed the kid for more than half the year is your main kicker and perhaps the caseworker informing the biological parent that they simply are not allowed to claim the child (if they indeed cannot) is the best answer.

Child Tax Credit
Can't include this unless you qualify for the dependency exemption.  This one is easy.  For every dependent you claim on your tax return under the age of 17, you get $1000.  (Unless you are a certain amount of rich, then it may be reduced.)  So if you are able to claim the children that are in foster care with you, bam, child tax credit.

Dependent Care Expenses Tax Credit
Also can't include this unless you qualify for the dependency exemption.  These last three here go hand in hand.  This tax credit is available if you had any out of pocket childcare expenses for kids under age 13, while you worked.  So for us, we've got the daycare subsidy, but that didn't kick in for almost two months (normally it's supposed to be two weeks but the investigative social work didn't complete the paperwork) so we wrote a hefty check to our daycare in the spring for the chunk of time before the subsidy began.  So we're claiming that amount which translates to a few hundred extra dollars of tax credit, aka money in our pocket.  This could also include, for other folks, day camps in the summer for school age kids, a regular after school program, etc.  Just keep in mind that it has to be childcare you paid for out of pocket.  Since you're not taxed on the daycare subsidy, you can't then double dip and also get a tax credit on your free subsidy benefit. you may have gathered, with all these benefits available to us by adding the kids to our tax return as dependents, we're staring at a nice chunk of refund, especially once you throw in Trent's education tax credits for being in college.   Lest all you parents out there who had your kids the old fashioned way think you are missing out on something here, you're not.  Those last three items are available to you in exactly the same ways for your biological children.  

Hope this was helpful.  Happy tax season everyone!


  1. We were bummed when we found out we missed claiming our foster daughter by about 2 weeks. She didn't live with anyone this year long enough to be claimed from what we can tell. Sigh. So close! (And it would have been a big help this year due to some other miscalculating of contractor taxes on a second job. Ugh.)

    1. Oh goodness that would have helped for sure! Those self employment taxes on contract labor will get ya. Been there...