New Tax Rules Benefit Adoptive/Foster Parents

Thanks for posting. Things change so quickly with the IRS sometimes, that I asked tax expert about this and here is his reply:"If the child meets the requirements for "qualifying child," the only concern adoptive/foster parents should have are:Did the child live with me for more than 6 months out of the year?Did the child earn any income?The child's income is probably zero or some other ridiculously small number. So basically we are concerned here with residency. That's the only question adoptive/foster parents should be worried about.The old support test is out the window (Congressionally defenestrated, so to speak). If the child resided with the adoptive/foster parents for six months or less, there's going to be a problem both under the qualifying child and the qualifying relative rules, and in general all signs point to "No you cannot claim the dependent."Basically, under the new rules for [url=http://taxes.about.com/od/dependents/a/Dependents.htm]dependents[/url], a dependent must meet one of two definitions: [url=http://taxes.about.com/od/dependents/a/Dependents.htm]qualifying child[/url] or [url=http://taxes.about.com/od/dependents/a/Dependents_2.htm]qualifying relative[/url]. Persons who would normally be claimed under the qualifying relative rules might be disallowed by the IRS if any other person could claim the dependent under the qualifying child rules. That means the qualifying child rules always trumps the qualifying relative rules, no exceptions allowed.An adopted or foster child will meet the definition of a qualifying child if: 1. The child lived with you for more than 6 months out of the year, 2. The child is under age 19, or under age 24 and a full-time student, or any age and permanently disabled, 3. The child did not provide over half of his or her own financial support.Foster care payments, adoption subsidies, employer reimbursements, grants, financial aid, etc. are considered support provided by an agency. Thus it does not count as the parents providing support or as the child providing her own support.If you cannot meet the qualifying child requirements (for example, you adopted late in the year and don't meet the residency test), you might be able to claim the dependent under the qualifying relative requirements. To be a qualifying relative, the adopted/foster child must: 1. Live with you for any amount of time during the year (no [url=http://taxes.about.com/od/dependents/a/Dependents_3.htm]minimum residency requirement[/url]), 2. Child must have income less than $3,200, 3. You must provide over half of the child's total financial support, 4. The child cannot be married and filing a joint return, 5. The child must be a citizen of the USA, Canada, or Mexico.Foster/adoptive parents will find the qualifying relative requirements harder to meet than the qualifying child requirements. In particular, parents must provide over half of the child's total financial support during the year. Foster care payment, adoption subsidies, grants, and so forth do not count as support provided by the parents.This is confusing, I know! In general, try to claim the child as a qualifying child. If that doesn't work, see if you meet the requirements for qualifying relative. If that doesn't work either, wait until next year to claim the child. Filling out worksheets to determine support can be a time-waster. However, such worksheets are extremely valuable in an audit situation. Remember: under the new rules, there's no support test for the parents under the qualifying child rules. Simply look at the child's income and compare that to a (rough) estimate of what it costs to support the child. If the child provides less than half of his or her own support, then you can claim the child as a dependent."

Thanks Nancy for all this valuable information here!This is my understanding too.I know it is confusing :? .I am looking at page 15 on the following link. If you look right in the middle of the page (I wasn't able to cut and paste) toward the top: See IRS Publication 501I'll type out what it (IRS) quotes:This was brought up by the IRS representitive and he told my dh he would need to do the support test to see if our son qualifies because foster payments were concidered support for the child--even though the child is not employed. We found it fairly easy to qualify with him anyway based on our mortgage division, utilities, etc..When my dh asked about our son who's adoption is finalized, the rep stated we can deduct him as he was relative that subsidy did not workthe same as foster care payments.I hope I'm not causing more confusion here. I just want to make sure everyone is really cautious before submitting their taxes.Best wishes.MJ

Thanks for posting. Was this for this year? The new rules seem to say differently, but if you use the link to William Perez's web site, there's a discussion forum where he's great about answering questions with these kinds of details. All best

yes, I had just pulled up the info off the IRS site the day I posted. Interesting huh?...I'll have to check at William Perez's site. A friend of mine checked with her accountant who confirmed the info I found as well... We already did our taxes. Personally I'm not concerned because in the worse case senerio (having to claim our children's subsidy and foster income as thier own) we found more than enough to claim them. I know a couple families that have been audited though and OUCH, when they got their penalties! I appreciate this thread. Thanks Nancy. MJ

when the child was born in 2005? We got our fs August 1st when he was 2 weeks old and he has lived with us since that time. So he only lived with us for 5 months but that is how old he was.

I believe it still has to be a 6 month minimum :(. The only excetion to this I believe, is if you adopted, finalizing in 2005.

IRS Code Section 131 says that foster care payments are tax-exempt! 131. Certain foster care payments Release date: 2005-08-31(a) General rule Gross income shall not include amounts received by a foster care provider during the taxable year as qualified foster care payments. (b) Qualified foster care payment defined For purposes of this sectionǗ (1) In general The term qualified foster care paymentӔ means any payment made pursuant to a foster care program of a State or political subdivision thereof (A) which is paid byח (i) a State or political subdivision thereof, or (ii) a qualified foster care placement agency, and (B) which is (i) paid to the foster care provider for caring for a qualified foster individual in the foster care providerגs home, or (ii) a difficulty of care payment. (2) Qualified foster individual The term qualified foster individualӔ means any individual who is living in a foster family home in which such individual was placed by (A) an agency of a State or political subdivision thereof, or (B) a qualified foster care placement agency. (3) Qualified foster care placement agency The term דqualified foster care placement agency means any placement agency which is licensed or certified byԗ (A) a State or political subdivision thereof, or (B) an entity designated by a State or political subdivision thereof, for the foster care program of such State or political subdivision to make foster care payments to providers of foster care. (4) Limitation based on number of individuals over the age of 18 In the case of any foster home in which there is a qualified foster care individual who has attained age 19, foster care payments (other than difficulty of care payments) for any period to which such payments relate shall not be excludable from gross income under subsection (a) to the extent such payments are made for more than 5 such qualified foster individuals. (c) Difficulty of care payments For purposes of this section (1) Difficulty of care payments The term דdifficulty of care payments means payments to individuals which are not described in subsection (b)(1)(B)(i), and whichԗ (A) are compensation for providing the additional care of a qualified foster individual which is (i) required by reason of a physical, mental, or emotional handicap of such individual with respect to which the State has determined that there is a need for additional compensation, and (ii) provided in the home of the foster care provider, and (B) are designated by the payor as compensation described in subparagraph (A). (2) Limitation based on number of individuals In the case of any foster home, difficulty of care payments for any period to which such payments relate shall not be excludable from gross income under subsection (a) to the extent such payments are made for more thanח (A) 10 qualified foster individuals who have not attained age 19, and (B) 5 qualified foster individuals not described in subparagraph (A).

Yes, they are exempt in that you are not required to claim them as taxable income, but foster care payments are still concidered child's income (non-taxable) according to the above IRS Publication 501 page 15 and you are required to look to see if you meet the support test criteria before claiming.

Now I am confused...Sorry, but I do not see anywhere mentioned in publication 501 that foster care payments are to be considered as the child's non-taxable INCOME... All I see is on page 15: Payments you receive for the support from a foster child of a child placement agency are concidered support provided by the agency. Similarly, payments you receive for the support of a foster child from a state or county are concidered support provided by the state or county. That would make them payments provided by others (state, agency) for the child's support, right? Now let's look at the "IRS Worksheet for Determining Support". You would enter "0" on line 1-5, unless your foster child has savings or an actual income (from working at McDonald's or similar). After filling out everything else, you are likely to answer "NO" on line 22. If your foster child meets all the other criteria (residency, etc.), IRS says you stop there. Which means that line 23, where you would enter the support provided by state or other agencies, never comes into play! Let me know if I see that wrong...(???)

I know it's confusing--and frustrating as I was initially making the points you were. I think the IRS looks at foster payments as support that is directly linked to the child for their care. Not ALL the foster payment has to be included, to my understanding, just the base rate which is for cost of living. If you get a special rate on top of that, it is usually for time spent working on special needs and doesn't qualify the same way. My dh called the IRS and spoke with John Yen IRS ID #84-20263 who confirmed that we did in fact have to qualify by the support test to claim our foster son and he confirmed everything we could include in determining how much money we spend in a month and it wasn't as hard as I thought. According to the tax expert that Nancy Ashe names, he has also found this to be true. I didn't think it was spelt out well enough in the IRS docs either, that's why we ended up calling. I would encourage you to do the same. Hopefully next time, they will spell it out for us better. I'll let you know too if I find any docs that are more clear to this. MJ

Listed under the section from page 14, Support Test (To Be a Qualifying Relative) Our foster children's support is concidered welfare. Note the last part of the quote where it states "not be concidered used entirely" which implies there is some part, the part that IS used for their support, is to be claimed.

Page 14, the support test for a qualifying RELATIVE does NOT apply at all to a foster child that you want to claim as a qualifying CHILD! See page 12 for the qualifying child support test. Thats why you will never make it to line 23 on Worksheet 1... I will call the IRS today and clear that up.... UPDATE: I called the IRS and talked to a Mrs. Varner and she said that Worksheet 1 applies for the support test and foster care payments for the child are NOT income or child's savings (Line 1) and would be support received by the state on Line 23 of the worksheet. Which means that it will not apply if your child is a qualifying child, only if you want to claim the child as a qualifying relative...

I know that I am new here, but I would like to clarify this discussion of the the tax law changes governing what constitutes a qualifying child. Income from the state or any other agency is not income to the child, but it is considered support. As someone above indicated, support (other than the child's *own* income) is not relevant to the qualifying child tests. It is only if the Foster Child is considered a qualifying *relative* that other support would matter. There is no reason I can think of to claim a foster child as a qualifying relative rather than a qualifying child, and in fact, one of the tests for a QR is that the person can't be a QC for anyone. For the poster who had a child in their home who was born in 2005, if the child lived there the entire time, they are considered to have lived there the entire year for the year they were born. This is also the case for a child who died during the year. For those who have, and those who plan to call the IRS, their customer service phone error rate is close to 50%. Please take what they say with a large grain of salt. If you want reliable advice, please seek the advice of a qualified tax professional such as an Enrolled Agent, CPA or attorney. In such cases, advice is often free. Regards, Snipes PS I am an Enrolled Agent.

Thank you greatly Snipes for that clarification. I did take what the IRS said seriously because they are the IRS and I thought they are supposed to know what they are doing. But how you worded it makes sense, yet sounds complex (which is why I guess people hire accountants to do their taxes). Regardless, we found we were able to claim our foster son (who we are adopting anyway) pretty easily. I didn't want to see anyone making mistakes on that would come back to bite them. Wow, an error rate of 50% from the IRS on the phone?! That's scary! MJ

Thanks for coming over from the FREE LEGAL ADVICE forum to post here, Snipes5 :)