If you're a foster parent, any stipend you receive normally is excluded from taxable income. Not only is your stipend tax-free, in some cases, fostering children may bring added write-offs.
Taxes on Payments
The IRS says in Bulletin 2014-4 that if you're fostering a child, or children in your home through a state program, your stipend is tax-free. This applies to both regular payments for the cost of supporting the child and extra difficulty of care payments when you're fostering a child with a disability. If you receive a Medicaid waiver so that Medicaid can help pay for care costs, the Medicaid assistance isn't taxable, as of this publication.
There are, of course, exceptions to the rules. Mid-Minnesota Legal Aid, for example, says that if you run a group home or foster more than 10 children at a time, your foster payments are taxable. If you have two homes, live in one and keep the foster kids in the other, your stipend probably is taxable as well.
You can claim a tax exemption for a foster child who meets the IRS' qualifying child standards for claiming a dependent. For this to occur, the child must be:
- Under 19, or under 24 and a student, or any age and fully disabled.
- Living with you for more than half the year.
- Providing less than half her support for the year. This is known as the support test.
At time of writing, each exemption you can claim reduces your taxable income by $4,000. There are multiple exceptions and special cases. For example if your foster child is in the hospital for several months, that still can count as time he's living with you.
Foster Child Deductions
You may able to take a charitable deduction for fostering a child. IRS Publication 526 says this includes money you spend to feed, clothe and shelter the child. However any food, clothing or shelter expenses you list when making the support test isn't deductible as charity. There's no charitable deduction if you plan to adopt the child you're fostering.
To claim any charitable deduction, you have to itemize deductions on Schedule A, rather than taking the standard deduction on Form 1040
Unlike tax deductions, a tax credit gets subtracted from your tax bill, not your taxable income. That saves more money.
Child Care Tax Credit
If you have to put a foster child under 12 in day care while you work or look for work — if you're married, both you and your spouse must be working or looking — you can take a child care tax credit. Depending on the number of children and your income, you can take up to 35 percent of qualifying child-care expenses. For one foster child, you can apply this percentage to up to $3,000 in child-care expenses.
Earned Income Tax Credit
If you earned income during the tax year and your foster child is a qualifying child, you may be entitled to an earned income tax credit. The credit allows low-income working families to claim a tax credit. The exact amount varies with your income and circumstances.