Foster Care Tax Credit: What You Need to Know About Claiming It

Caring for a foster child comes with emotional and financial responsibilities, but tax benefits can help offset some costs. The foster care tax credit allows eligible foster parents to claim specific expenses, potentially reducing their tax burden. Understanding eligibility, qualified expenses, and required documentation ensures you maximize available deductions and credits.

Eligibility Criteria

To qualify for foster care tax benefits, the child must be placed in your home by a government agency or licensed foster care organization. Private arrangements, such as taking in a child without official placement, do not meet IRS requirements. Documentation from the agency is often required.

The foster child must meet the IRS definition of a qualifying child, meaning they must have lived with you for more than half the year, with exceptions for temporary absences due to medical care, school, or other valid reasons. Unlike biological or adopted children, a foster child does not need to be related to you but must be under 19 years old at the end of the tax year, or under 24 if a full-time student. There is no age limit if the child is permanently disabled.

Filing status affects eligibility. Single filers, married couples filing jointly, and heads of household may qualify, but those married filing separately often face restrictions. Additionally, adjusted gross income (AGI) determines eligibility for certain credits, as some phase out at higher income levels.

Qualified Expenses

Foster parents may deduct or receive tax credits for certain expenses related to the child’s care, provided they are not reimbursed by the government or a foster care agency.

Basic Living Costs

Everyday expenses such as food, clothing, and housing are necessary but generally not deductible. However, qualifying for the Child Tax Credit (CTC) or Earned Income Tax Credit (EITC) can help offset these costs. The CTC provides up to $2,000 per qualifying child, with up to $1,600 refundable in 2023.

If you provide more than half of the child’s support and meet IRS dependency requirements, you may claim the foster child as a dependent, which can lead to additional tax benefits. Keeping records of grocery bills, clothing purchases, and rent or mortgage payments helps substantiate claims if needed.

Medical and Health Expenses

Unreimbursed medical expenses for a foster child may be deductible if they exceed 7.5% of AGI and you itemize deductions. Eligible expenses include doctor visits, prescriptions, dental care, vision services, and mental health treatments. Costs for therapy, medical equipment, and home modifications for children with special medical needs may also qualify.

Health insurance premiums paid for the foster child can sometimes be included in deductible medical expenses, but Medicaid or state-sponsored program coverage is not eligible. Transportation expenses related to medical care, such as mileage to doctor appointments, can be deducted at the IRS medical mileage rate, which is 22 cents per mile for 2023. Keeping records of medical bills, insurance statements, and travel logs is essential.

Educational Expenses

School-related costs can be significant, but only certain expenses qualify for tax benefits. Public school tuition is not deductible. However, private or specialized school costs for children with medical or learning disabilities may be considered medical expenses and deducted if they exceed the 7.5% AGI threshold.

Tutoring or special education services prescribed by a doctor may also be deductible. Contributions to a 529 plan for the foster child’s future education grow tax-free, and withdrawals for qualified education expenses are not subject to federal tax. Foster parents typically do not qualify for the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Credit (LLC) unless they claim the child as a dependent, but state-level education tax credits or deductions may be available. Keeping receipts for tuition, tutoring, and educational supplies is important for substantiating claims.

Documentation Needed

Proper record-keeping is necessary to substantiate any foster care-related tax benefits. The IRS may request proof that the child was placed in your home through a recognized agency, so official placement documents from a state or county child welfare department, court order, or licensed foster care organization should be retained. These documents confirm the legal status of the foster relationship and establish the timeframe of placement.

Maintaining detailed financial records is essential. Tracking out-of-pocket expenses with receipts, invoices, and bank statements ensures only qualified costs are claimed. If you receive stipends or subsidies for foster care, keeping records of these payments alongside personal expenditures helps distinguish reimbursed amounts from deductible expenses. A spreadsheet or accounting software can simplify tracking expenses.

Proving the child’s residency may also be necessary. School enrollment records, medical records listing your address, or letters from social workers can serve as supporting evidence. If claiming the child as a dependent, the IRS may require additional proof, such as a signed statement from the foster care agency confirming placement duration.

Tax Implications of Reimbursements

Government agencies and foster care organizations often provide financial assistance to offset fostering costs. These payments, commonly referred to as foster care stipends or reimbursements, generally do not constitute taxable income under IRS guidelines if they are designated for the child’s care and provided by a state or licensed agency. Section 131 of the Internal Revenue Code classifies these payments as “qualified foster care payments,” which are excluded from gross income if used for the child’s living expenses.

If a foster parent receives payments beyond the standard reimbursement rate, tax treatment may differ. Difficulty-of-care payments—additional funds for fostering children with special medical, emotional, or behavioral needs—are non-taxable if directly tied to the child’s care. However, if these payments exceed reasonable expenses or are retained without being spent on the child’s needs, the excess could be considered taxable income. Proper documentation of expenditures is necessary to justify the exclusion of these payments from taxable income.