by Bob Rywick
An individual (“provider”) who takes care of a “qualified foster individual” in her home may be able to get the following tax benefits for doing so:
● The provider may be able to exclude from gross income payments received from an agency for caring for the qualified foster individual;
● The provider may be able to deduct some of the expenses of taking care of the qualified foster individual as a charitable deduction; and,
● The provider may be able to claim a personal exemption for the qualified foster individual as a dependent.
Exclusion of payments from an agency from gross income. The provider will be able to exclude the payments from gross income, but only if:
● The payments are made under a foster care program of a state or local government; and,
● The agency making the payments is either part of the state or local government or is licensed or certified by the state or local government, and the payments are for the care of a qualified foster individual.
A qualified foster individual is any individual who is living in a foster family home in which the individual was placed by an agency of a state or political subdivision of the state, or a qualified foster care placement agency.
A qualified foster care placement agency generally is an agency licensed or certified by a state or political subdivision under its foster care program. An individual who is placed in a foster family home may be a qualified foster individual regardless of the individual’s age at the time of placement. For example, an individual who is 20 years old when placed in a foster home by a qualified foster care placement agency is a qualified foster individual.
However, there are limits on the exclusion of qualified foster care payments from gross income that are paid with respect to individuals who are 19 or older. Foster care payments are not excludable from gross income to the extent that they are made for more than five qualified foster individuals who are age 19 or older.
Example 1: Your client cares for eight qualified foster individuals in her home. Seven of these individuals are at least 19 years old. She received $40,000 as qualified foster care payments for the year, i.e., $5,000 per individual. Your client may exclude only $30,000 from her gross income. This equals $5,000 for the one individual who is under 19, and $25,000 for five of the 19 or older individuals. She cannot exclude $10,000 of the amount paid for two of the individuals who are 19 or older, i.e., for the sixth and seventh such individuals.
And in the case of any foster home, difficulty-of-care payments for any period to which they relate aren’t excludable from gross income to the extent that they are made for more than:
● Ten qualified foster individuals under 19; and,
● Five qualified foster individuals who are 19 or older.
Example 2: Your client cared for 11 qualified foster individuals under 19 in her home and received $55,000 in basic foster care payments ($5,000 for each individual), and $16,500 as difficulty-of-care payments ($1,500 for each individual) for the year. The amount excludable from your client’s gross income is $70,000, i.e., the entire $55,000 for basic care and $15,000 of the $16,500 difficulty- of-care payments.
Thus, the $1,500 difficulty-of- care payment for the 11th individual is not excluded.
Example 3: The same facts apply as in Example 2, except that all of the 11 foster care individuals are 19 or older. Your client can only exclude $32,500 from her gross income (a $5,000 basic payment for each of five individuals, and a $1,500 difficulty-of-care payment for five individuals).
A provider who receives payments that he must include in income under the above rules is treated as being in business as a self-employed foster care provider and must report the payments on Schedule C or Schedule C-EZ. Expenses allocated to payments included in income may be deducted in computing the taxable income (or loss) from the business of being a foster care provider.
There is no record-keeping required to qualify for the exclusion for qualified foster care payments.
Difficulty-of-care payments are additional payments to providers that aren’t merely payments for caring for a qualified foster individual in the provider’s home. They are payments specifically designated by the payor as compensation for providing the additional care of a qualified foster individual that is needed because of a physical, mental or emotional handicap with respect to which the state has determined that there is a need for additional compensation. The additional care must be provided in the home of the foster care provider.
Charitable deductions for unreimbursed expenses. If the placing agency is a government agency or an agency exempt from income taxes and eligible to receive contributions for which the giver can get a charitable deduction, a provider can get a charitable deduction for unreimbursed out-of-pocket expenses paid for the support of a qualified foster individual.
A provider who wants to claim such a charitable deduction should keep records of the expenses to meet the general requirements for a charitable deduction and to show that the payments received by the provider are less than the allowable expenses.
Also, any part of the payments not designed to reimburse the provider for expenses won’t reduce the charitable deduction even if the part is excludable from gross income. For example, suppose the provider receives $10,000 of excludable payments from the agency, and $5,000 is allocable to the provider’s out-of-pocket expenses for the qualified foster individual, and $5,000 is allocable to indirect expenses, such as the individual’s share of the cost of shelter. Suppose also that the provider’s actual out-of-pocket expenses amount to $7,000. In that case, the provider is entitled to a $2,000 charitable deduction ($7,000 less $5,000) in addition to the $10,000 exclusion.
The records should include an expense journal (noting the purpose, amount, date and payee for each expense), cancelled checks and receipts. The provider will also need to get from the placement agency, each year before the earlier of when the provider files her return or the return due date (including extensions), a written statement containing:
● A description of the service the provider is performing;
● The dates of service; and,
● A statement of whether or not the agency is providing any goods and services to the provider in exchange for the unreimbursed expenses and, if so, a description and good faith estimate of the value of those goods and services.
To qualify for the charitable deduction, the expenses must be paid during the tax year, should be for the exclusive benefit of the qualified foster individual, and shouldn’t be paid to buy or improve property in which the provider retains any interest. The provider, however, may deduct an allocable share of a collective family expense.
For example, the provider may deduct her share of utility bills reflecting the additional use necessitated by the presence of one or more qualified foster individuals.
Deductible expenses include expenses for food, shelter, clothing, personal needs (such as haircuts and toilet articles), school supplies and dues, youth organization memberships, school transportation and other travel expenses, and a spending allowance. Deductible expenses also include expenses for toys, education, medical care, babysitting and recreation.
To be deductible as a charitable contribution, the provider must be acting without a profit motive.
Personal exemption deduction as a dependent. A provider is allowed to claim a dependency deduction for a qualified foster individual for any year in which the individual is a member of the provider’s household for the entire year, but only if the provider provides over 50 percent of the individual’s support for the year. It makes no difference how much income the qualified foster individual had if:
● The individual was less than 19 years of age at the end of the year; or,
● Was less than 24 years of age at the end of the year, and was a full-time student for at least five months during the year.
In determining whether the provider meets the 50 percent support test, payments received for care of the qualified foster individual from a placement agency are considered support provided by the agency. Similarly, payments from a state or county for foster care are considered support provided by the state or county.
Also, any unreimbursed expenses that the provider deducts as charitable contributions count in computing the total support provided for the qualified foster individual, but aren’t considered support provided by the provider.
Observation: It’s unlikely that a provider will be able to claim both a charitable deduction and a personal exemption with respect to expenses incurred for the same qualified foster individual.
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