Tax Breaks and Credits for Foster Parents

The federal tax code offers financial relief for individuals providing foster care. For tax purposes, the Internal Revenue Service (IRS) defines a foster child as an individual placed in your home by a court order, a judgment, or an authorized placement agency. Authorized placement agencies include state and local government bodies or certain tax-exempt organizations licensed by a state.

Determining Dependent Status for a Foster Child

Before any tax credits can be claimed, a foster child must meet the IRS requirements to be considered a taxpayer’s “qualifying child” for dependent status. This determination rests on four distinct tests, all of which must be satisfied: Relationship, Age, Residency, and Support.

Claiming a foster child as a dependent is separate from receiving financial assistance for their care. Dependent status on a tax return provides access to credits that reduce your tax liability, while foster care payments are intended to cover the child’s daily needs.

Relationship Test

The Relationship Test requires the child to be placed with you by an authorized placement agency or a court order. This formal placement distinguishes a foster child from a child living with you informally. Unlike with a biological child, this relationship is established through a legal or administrative action, and simply caring for a child without it does not satisfy the test.

Age Test

The Age Test sets specific limits on the child’s age to qualify as a dependent. Generally, a foster child must be under the age of 19 at the end of the tax year. An exception exists if the child is a full-time student, which extends the age limit to under 24. In either case, the child must be younger than you or your spouse if filing a joint return.

If a foster child has a permanent and total disability at any time during the year, they can be claimed as a dependent regardless of their age.

Residency Test

The Residency Test requires the foster child to have lived with you for more than half of the tax year. Temporary absences for school, vacations, medical care, or military service are still counted as time lived at home.

If a child was born or passed away during the year, they are considered to have lived with you for the entire year if your home was their home for the entire time they were alive.

Support Test

The Support Test requires that the child did not provide more than half of their own financial support during the tax year. When calculating support, foster care payments have specific rules.

Payments received from a child placement agency or government body are considered support provided by that agency, not by the foster parent. These payments are also not counted as support provided by the child. A foster parent may still provide more than half of the child’s total support if their out-of-pocket expenses for the child exceed the amount of the foster care payments.

Tax Implications of Foster Care Payments

Payments from a qualified placement agency for a foster child’s care are generally not taxable income, as the IRS views them as reimbursements for expenses. These reimbursements are often referred to as “difficulty of care payments” and remain non-taxable.

However, some payments are taxable. For instance, if you receive payments to maintain a space in your home for emergency foster care, those payments must be included in your taxable income.

Primary Tax Credits for Foster Parents

Once a foster child is determined to be a qualifying dependent, foster parents may be eligible for several tax credits. These credits directly reduce the amount of tax owed, and in some cases, can result in a refund. The primary credits include the Child Tax Credit, the Earned Income Tax Credit, and the Child and Dependent Care Credit.

The Child Tax Credit is available for each qualifying child under the age of 17 at the end of the tax year. For the 2025 tax year, the credit is worth up to $2,000 per child, and a portion may be refundable as the Additional Child Tax Credit. To claim this credit, you must list the child as a dependent on your Form 1040.

The credit begins to phase out for taxpayers with modified adjusted gross incomes over $200,000, or $400,000 for joint filers. If a foster child does not meet the age requirement for the Child Tax Credit, you may claim the non-refundable Credit for Other Dependents.

The Earned Income Tax Credit (EITC) is a refundable credit for low- to moderate-income working individuals and families. Having a qualifying foster child can significantly increase the amount of the EITC you receive. Eligibility depends on your earned income, adjusted gross income, and the number of qualifying children you claim. To claim the EITC with a qualifying child, you must attach Schedule EIC to your tax return.

The Child and Dependent Care Credit helps cover the costs of care for a qualifying person while you work or look for work. For this credit, a qualifying foster child must generally be under the age of 13. The credit is a percentage of your work-related care expenses, with a maximum expense limit of $3,000 for one qualifying person and $6,000 for two or more. To claim this credit, you must complete and attach Form 2441 to your tax return.

The Federal Adoption Tax Credit

For foster parents who legally adopt their foster child, the federal government offers the Adoption Tax Credit. This credit helps offset the costs of the adoption process. It is a non-refundable credit, meaning it can reduce your tax liability to zero, but you will not get any of it back as a refund beyond what you owe. Any unused credit can be carried forward for up to five years.

For the 2025 tax year, the maximum credit amount is $17,280 per eligible child. This credit is subject to income limitations and begins to phase out for taxpayers with modified adjusted gross incomes above $259,190. The credit is claimed by filing Form 8839, Qualified Adoption Expenses, with your federal income tax return.

Qualified adoption expenses are the reasonable and necessary costs directly related to the legal adoption of a child. These include court costs, attorney fees, adoption fees, and travel expenses while away from home. Expenses for which you are reimbursed by an employer or a government program do not qualify, and you cannot claim the credit for adopting your spouse’s child.

A special rule applies when adopting a child with special needs from foster care. If a state determines that a child has special needs, the adoptive parents can claim the maximum adoption tax credit amount regardless of whether they had any qualified adoption expenses. A child is considered to have special needs if a state welfare agency determines they cannot be returned to their parent’s home and that adoption assistance is necessary to place the child.