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  #1  
Old 04-15-2010, 11:00 AM
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LadyBugz LadyBugz is offline
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Income Tax Redux: Providing more than half of the child's support

While it is clear that the code says a dependent child could not have provided more than half of their own support, I recall the discussion going that as subsidy was not claimed as taxable income and was not from the child providing his own support that foster parents did not need to worry in most cases about this particular qualifier for a dependent child, the exception being those children who worked and paid directly for their own support.

I just read Publication 17 Chapter 3 on the IRS site which says that subsidy or reimbursement for providing foster care is considered support by the county or agency for the child. It appears that a foster parent needs to provide more support than the reimbursement. The publication lists out ways to calculate the child's support costs including fair rental rate of the furnished room with utilities, division of food, etc. When a foster parent adds up all eligible expenses, then deducts all support from state aid like food stamps or WIC and all county aid like foster care stipend then the amount left that the family is providing has to be more than half the total support number.

While those who receive small stipends can easily show more than half the support, those who have therapeutic or medical needs children who receive much of the child's support through the state might not be able to claim the children if my reading of this is correct.

Let's say you get $1200 for a high needs child in foster care reimbursement, $500 in WIC benefits for a child, $275 in transportation reimbursement, Medicaid paid for $3,125 in medications and medical equipment, and you got $150 in clothing reimbursement. If you add up everything it costs to support that child including fair rental rate of the room and utilities, food, transportation, medication, etc and you come up with $10,000 a month to support that child then you can't claim the child. $10,000 to support him minus the $5,250 you are getting in support means the $4,750 out of your pocket every month doesn't qualify. Right? But you could then argue that you are in the trade or business of supporting the foster care agency and you could deduct that $4,750 as charitable contributions, right?

Does anyone have any clarifying or overriding information about this? Unless we identify otherwise, none of us are tax professionals or are giving financial advice, myself included. We're just discussing our personal and unprofessional experiences and understandings of things that are worthy of discussing with our individual tax professionals.

Publication 17 (2009), Your Federal Income Tax

Quote:
Support provided by the state (welfare, food stamps, housing, etc.). Benefits provided by the state to a needy person generally are considered support provided by the state. However, payments based on the needs of the recipient will not be considered as used entirely for that person's support if it is shown that part of the payments were not used for that purpose.

Foster care payments and expenses. Payments you receive for the support of a foster child from a child placement agency are considered support provided by the agency. Similarly, payments you receive for the support of a foster child from a state or county are considered support provided by the state or county.

If you are not in the trade or business of providing foster care and your unreimbursed out-of-pocket expenses in caring for a foster child were mainly to benefit an organization qualified to receive deductible charitable contributions, the expenses are deductible as charitable contributions but are not considered support you provided. For more information about the deduction for charitable contributions, see chapter 24. If your unreimbursed expenses are not deductible as charitable contributions, they are considered support you provided.

If you are in the trade or business of providing foster care, your unreimbursed expenses are not considered support provided by you.

Example. Lauren, a foster child, lived with Mr. and Mrs. Smith for the last 3 months of the year. The Smiths cared for Lauren because they wanted to adopt her (although she had not been placed with them for adoption). They did not care for her as a trade or business or to benefit the agency that placed her in their home. The Smiths' unreimbursed expenses are not deductible as charitable contributions but are considered support they provided for Lauren.
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  #2  
Old 04-15-2010, 11:14 AM
Chancey Chancey is offline
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My reading of this and publication 501 is totally contradictory to what you are saying.

Publication 501 states that the child can not have provided more than half their own support.

Publication 17 states: "Similarly, payments you receive for the support of a foster child from a state or county are considered support provided by the state or county".

To me this reads as clarification to publication 501 - saying the agency or state is the one paying so they are not considered the "child" paying and as such you CAN claim them with out the "support test".

Please refer to this page on publication 501
Publication 501 (2009), Exemptions, Standard Deduction, and Filing Information

They explicitly talk about the "support test" and state "To meet this test, the child cannot have provided more than half of his or her own support for the year."
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Old 04-15-2010, 11:19 AM
Annyka Annyka is offline
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Support by the state, and support by the agency are just that - support by the state, and support by the agency - NOT support provided by the child for themselves.

The test to be a Qualifiying Child is the one to follow. That has nothing to do with providing more than half of the child's support - that is the test of qualify relative, which is different and does not apply to foster children.

You get to claim the child as a dependent, but cannot deduct any expenses you had - this discussion is to counter the suggestion that expenses beyond the stipends that the state or agency provides should be "charitable deductions" for "supporting" the state or agency - and the IRS is saying "Um, no".
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  #4  
Old 04-15-2010, 11:32 AM
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LadyBugz LadyBugz is offline
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Chancey, Good point! This seems to contradict your understanding of the support test:

Quote:
Support Test (To Be a Qualifying Relative) To meet this test, you generally must provide more than half of a person's total support during the calendar year.

However, if two or more persons provide support, but no one person provides more than half of a person's total support, see Multiple Support Agreement, later.

How to determine if support test is met. You figure whether you have provided more than half of a person's total support by comparing the amount you contributed to that person's support with the entire amount of support that person received from all sources. This includes support the person provided from his or her own funds.

You may find Worksheet 3-1 helpful in figuring whether you provided more than half of a person's support.
That worksheet then has you calculate how much the child's care costs, how much you put towards the child's care, and "the amount others provided for the person's support. Include amounts provided by state, local, and other welfare societies or agencies." It than has you compare what you gave and what others gave, including the state, and says you can only claim the child if you gave more. The other exception of relevance to us is if there is a multiple support agreement in which the party able to claim the child allows another party who provided support to claim the child. While most common in divorce settlements, do the states or counties have any standing allowance for foster parents to claim the children?

However, this is a qualifying relative test, which is different from a qualifying child test.

Quote:
Support Test (To Be a Qualifying Child) To meet this test, the child cannot have provided more than half of his or her own support for the year.

This test is different from the support test to be a qualifying relative, which is described later. However, to see what is or is not support, see Support Test (To Be a Qualifying Relative), later. If you are not sure whether a child provided more than half of his or her own support, you may find Worksheet 3-1 helpful.
That seems to support you! Input?
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  #5  
Old 04-15-2010, 11:35 AM
Annyka Annyka is offline
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Yes, you want qualifying child, not qualifying relative.
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  #6  
Old 04-15-2010, 11:37 AM
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LadyBugz LadyBugz is offline
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Annyka,

I was writing while you responded. Thanks!

I was sure I had it right in the first place but the IRS guy told me I had it wrong and pointed me there.
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  #7  
Old 04-15-2010, 11:58 AM
Chancey Chancey is offline
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Yep, qualifying child vs. qualifying relative.

This was a good post to double check on our ability to claim our FK's.

Thanks LadyBugz.
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  #8  
Old 04-15-2010, 12:09 PM
DianeS DianeS is offline
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You definately want qualifying CHILD.

And the only way to fail the support test for qualifying CHILD is if the child himself hands you his own money above a certain amount. (Money from the state or agency - no matter the amount - can not make anyone fail the support test).

Note: The first test for whether someone can be your qualifying *relative* is if that person is already not eligable to be anybody's qualifying CHILD. Therefore you have to do the qualifying child tests first. If the child can be your qualifying child, then there is no need - and no purpose - to even looking at the qualifying relative tests.
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