[NancyAshe]

The IRS definition of a "dependent" has changed and applies to your 2005 tax returns. The new rules benefit adoptive and foster parents, according to tax expert William Perez, who says:

"The child needs to live with you for more than half the year, and must not have provided more than half of his or her own financial support. (That is, a child star's mom cannot claim her as a dependent, because she provides for more than half of her financial support, or at least I would think so.)

The change from parents providing over half the support (old rules) to the child not providing over half of the support (new rules) will make it easier for children in families receiving various types of financial aid, grants, and reimbursements to qualify as dependents under the new rules.

The new rules make it much easier for adoptive and foster parents (although, they seem to be making life miserable for everyone else). The dependent cannot provide more than half of his or her own financial support. And that basically means they cannot have significant income. Gifts/grants/financial aid are not income. Even if the subsidies count as support, this subsidy is not provided by the child, but by an agency. So the child is still not providing her own financial support.

The new rules make it hard for parents of college students, who might have full or part time jobs. Under the old rules, dependents in college could earn any amount of money and still be a dependent. Not so under the new rules.

Disclaimer: Under the provisions of Treasury Circular 230, written advice cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer for following the advice."

This year, the same as last, the adoption tax credit remains at $10,390.
EDITED: The amount of the tax credit is $10,630.
To learn more, visit tax-credit.adoption.com.

For more information on claiming a dependent child, see:

Claiming Dependents, from William Perez, About Tax Planning
Definition of a "Qualifying Child", from the IRS

[Cobb]

Thank you so much for posting this! One of our foster daughter's has a high subsidy since she's medically fragile and we've been going in circles for weeks trying to figure this out. This is the clearest explanation of the rules I've seen! Again, thank you so much!

Cobb

[LisaCA]

I just downloaded the form 8839 (Qualified Adoption Expenses) and it says that the credit maximum per child is $10,630 for tax year 2005.

[NancyAshe]

You are absolutely right - I will correct the post and the tax-credit info page. Good catch! Thanks.

[mj77]

There seem to be a couple discussions on tax laws going on. I want to post what I did on the other thread too as I think some are mis-informed and confused.

If you have a foster child in your home, YOUR FOSTER PAYMENT IS CONCIDERED THE CHILD'S SUPPORT (foster payment is different from adoption subsidy). However, if you are getting a special rate on top of that it is not (rather it is usually for time rather than cost of living expenses). You only have to show you've paid more than the base rate in your state on top of the base, in other words, if I get 378, I have to show that I paid 757 at least. There is a support form you fill out to see if you meet the eligability to claim your foster child. This is the tax law for 2005. If you have adopted and you are recieving subsidy, it is completely different and you can claim your child regardless. My dh just talked with the IRS and asked about this.I believe the foster child does have to live with you at least half the year first. Please check with the IRS yourself so you don't do your taxes wrong!

You CAN include your mortgage/rent/or rentable value of your home and divide it by the number of familiy members residing. In addition, you can include costs of food, utilities, milege, gas, personal expenses for the child.... We found it really easy to show we paid more than double the base. If you need to the IRS reps ID that told my dh this, PM me for it.

Here is a link to further information:
See IRS Publication 501 at http://www.irs.gov/pub/irs-pdf/p501.pdf
Page 15 explains foster payments received.

The following was copied from the IRS website:

A “Qualifying Child”

FS-2005-7, January 2005

Uniform Definition
A “qualifying child” may enable a taxpayer to claim several tax benefits, such as head of household filing status, the exemption for a dependent, the child tax credit, the child and dependent care credit and the earned income tax credit. Prior to 2005, each of these items defined a qualifying child differently, leaving many taxpayers confused.

The Working Families Tax Relief Act of 2004 set a uniform definition of a qualifying child, beginning for Tax Year 2005. This standard definition applies to all five of the tax benefits noted above, with each benefit having some additional rules.

In general, to be a taxpayer’s qualifying child, a person must satisfy four tests:

Relationship — the taxpayer’s child or stepchild (whether by blood or adoption), foster child, sibling or stepsibling, or a descendant of one of these.
Residence — has the same principal residence as the taxpayer for more than half the tax year. Exceptions apply, in certain cases, for children of divorced or separated parents, kidnapped children, temporary absences, and for children who were born or died during the year.
Age — must be under the age of 19 at the end of the tax year, or under the age of 24 if a full-time student for at least five months of the year, or be permanently and totally disabled at any time during the year.
Support — did not provide more than one-half of his/her own support for the year. If a child is claimed as a qualifying child by two or more taxpayers in a given year, the child will be the qualifying child of:

the parent;
if more than one taxpayer is the child’s parent, the one with whom the child lived for the longest time during the year, or, if the time was equal, the parent with the highest AGI;
if no taxpayer is the child’s parent, the taxpayer with the highest adjusted gross income (AGI).
Additional Rules
While the four qualifying child tests generally apply for the five tax benefits noted above, there are some additions or variations for particular provisions:

Dependent — a qualifying child must also meet these tests:

Nationality — be a U.S. citizen or national, or a resident of the U.S., Canada or Mexico. There is an exception for certain adopted children.
Marital status — if married, did not file a joint return for that year, unless the return is filed only as a claim for refund and no tax liability would exist for either spouse if they had filed separate returns.
Head of Household Filing Status — a qualifying child is determined without regard to the exception for children of divorced or separated parents. Also, a qualifying child who is married at the end of the year must meet the marital status and nationality tests for a dependent (above).

Credit for Child and Dependent Care Expenses — a qualifying child must be under the age of 13 or permanently and totally disabled. A qualifying child is determined without regard to the exception for children of divorced or separated parents and the exception for kidnapped children.

Child Tax Credit — a qualifying child must be under age 17 and a U.S. citizen or national or a U.S. resident.

Earned Income Tax Credit — a qualifying child does not have to meet the support test. Also, a qualifying child must have lived with the taxpayer in the United States for more than half the year and have a social security number that is valid for employment in the United States. A qualifying child is determined without regard to the exception for children of divorced or separated parents. If a qualifying child is married, he or she must also meet the marital status and nationality tests for a dependent (above).

Changes to Certain Benefits
The new law does not change the operation of the Child Tax Credit, but it does affect these benefits:

Dependent — There are two types of dependents, a qualifying child and a qualifying relative. The five dependency tests — relationship, gross income, support, joint return and citizenship/residency — continue to apply to a qualifying relative. A child who is not a qualifying child might still be a dependent as a qualifying relative. If you are a dependent of another person, you cannot claim any dependents on your own return. .

Head of Household Filing Status — A taxpayer is eligible for head of household filing status only with respect to a qualifying child or the taxpayer’s dependent. But the taxpayer cannot file as head of household for a person who is a dependent only because he or she lived with the taxpayer for the whole year or because the taxpayer may claim him or her as a dependent under a multiple support agreement.

Child Tax Credit — The taxpayer is no longer required to care for a foster child, sibling, or sibling’s descendant as one’s own child.

Credit for Child and Dependent Care Expenses — The taxpayer is no longer required to pay over half the costs of maintaining a household for the qualifying individual. But, an individual who is not a qualifying child must have the same principal residence as the taxpayer for more than half the year.

Earned Income Tax Credit — The taxpayer is no longer required to care for a foster child, sibling, or sibling’s descendant as one’s own child.

[NancyAshe]

Thanks for posting. Things change so quickly with the IRS sometimes, that I asked tax expert William Perez about this and here is his reply:

"If the child meets the requirements for "qualifying child," the only concern adoptive/foster parents should have are:
Did the child live with me for more than 6 months out of the year?
Did the child earn any income?

The child's income is probably zero or some other ridiculously small number. So basically we are concerned here with residency. That's the only question adoptive/foster parents should be worried about.

The old support test is out the window (Congressionally defenestrated, so to speak). If the child resided with the adoptive/foster parents for six months or less, there's going to be a problem both under the qualifying child and the qualifying relative rules, and in general all signs point to "No you cannot claim the dependent."

Basically, under the new rules for dependents, a dependent must meet one of two definitions: qualifying child or qualifying relative. Persons who would normally be claimed under the qualifying relative rules might be disallowed by the IRS if any other person could claim the dependent under the qualifying child rules. That means the qualifying child rules always trumps the qualifying relative rules, no exceptions allowed.

An adopted or foster child will meet the definition of a qualifying child if:

1. The child lived with you for more than 6 months out of the year,
2. The child is under age 19, or under age 24 and a full-time student, or any age and permanently disabled,
3. The child did not provide over half of his or her own financial support.

Foster care payments, adoption subsidies, employer reimbursements, grants, financial aid, etc. are considered support provided by an agency. Thus it does not count as the parents providing support or as the child providing her own support.

If you cannot meet the qualifying child requirements (for example, you adopted late in the year and don't meet the residency test), you might be able to claim the dependent under the qualifying relative requirements. To be a qualifying relative, the adopted/foster child must:

1. Live with you for any amount of time during the year (no minimum residency requirement),
2. Child must have income less than $3,200,
3. You must provide over half of the child's total financial support,
4. The child cannot be married and filing a joint return,
5. The child must be a citizen of the USA, Canada, or Mexico.

Foster/adoptive parents will find the qualifying relative requirements harder to meet than the qualifying child requirements. In particular, parents must provide over half of the child's total financial support during the year. Foster care payment, adoption subsidies, grants, and so forth do not count as support provided by the parents.

This is confusing, I know! In general, try to claim the child as a qualifying child. If that doesn't work, see if you meet the requirements for qualifying relative. If that doesn't work either, wait until next year to claim the child. Filling out worksheets to determine support can be a time-waster. However, such worksheets are extremely valuable in an audit situation. Remember: under the new rules, there's no support test for the parents under the qualifying child rules. Simply look at the child's income and compare that to a (rough) estimate of what it costs to support the child. If the child provides less than half of his or her own support, then you can claim the child as a dependent."

[mj77]

Thanks Nancy for all this valuable information here!

Originally Posted by NancyAshe

Foster care payment, adoption subsidies, grants, and so forth do not count as support provided by the parents.

This is my understanding too.

I know it is confusing :? .I am looking at page 15 on the following link. If you look right in the middle of the page (I wasn't able to cut and paste) toward the top: See IRS Publication 501 at http://www.irs.gov/pub/irs-pdf/p501.pdf .

I'll type out what it (IRS) quotes:

Payments you receive for the support from a foster child of a child placement agency are concidered support provided by the agency. Similarly, payments you receive for the support of a foster child from a state or county are concidered support provided by the state or county.

This was brought up by the IRS representitive and he told my dh he would need to do the support test to see if our son qualifies because foster payments were concidered support for the child--even though the child is not employed. We found it fairly easy to qualify with him anyway based on our mortgage division, utilities, etc..When my dh asked about our son who's adoption is finalized, the rep stated we can deduct him as he was relative that subsidy did not workthe same as foster care payments.

I hope I'm not causing more confusion here. I just want to make sure everyone is really cautious before submitting their taxes.

Best wishes.
MJ

[NancyAshe]

Thanks for posting. Was this for this year? The new rules seem to say differently, but if you use the link to William Perez's web site, there's a discussion forum where he's great about answering questions with these kinds of details.

All best

[mj77]

yes, I had just pulled up the info off the IRS site the day I posted. Interesting huh?...I'll have to check at William Perez's site. A friend of mine checked with her accountant who confirmed the info I found as well...

We already did our taxes. Personally I'm not concerned because in the worse case senerio (having to claim our children's subsidy and foster income as thier own) we found more than enough to claim them. I know a couple families that have been audited though and OUCH, when they got their penalties!

I appreciate this thread. Thanks Nancy.

MJ

[ally123]

when the child was born in 2005? We got our fs August 1st when he was 2 weeks old and he has lived with us since that time. So he only lived with us for 5 months but that is how old he was.

[mj77]

I believe it still has to be a 6 month minimum . The only excetion to this I believe, is if you adopted, finalizing in 2005.

[TNParent]

IRS Code Section 131 says that foster care payments are tax-exempt!





§ 131. Certain foster care payments



Release date: 2005-08-31(a) General rule Gross income shall not include amounts received by a foster care provider during the taxable year as qualified foster care payments.

(b) Qualified foster care payment defined For purposes of this section—
(1) In general The term “qualified foster care payment” means any payment made pursuant to a foster care program of a State or political subdivision thereof—
(A) which is paid by— (i) a State or political subdivision thereof, or
(ii) a qualified foster care placement agency, and


(B) which is— (i) paid to the foster care provider for caring for a qualified foster individual in the foster care provider’s home, or
(ii) a difficulty of care payment.


(2) Qualified foster individual The term “qualified foster individual” means any individual who is living in a foster family home in which such individual was placed by—
(A) an agency of a State or political subdivision thereof, or
(B) a qualified foster care placement agency.

(3) Qualified foster care placement agency The term “qualified foster care placement agency” means any placement agency which is licensed or certified by—
(A) a State or political subdivision thereof, or
(B) an entity designated by a State or political subdivision thereof,

for the foster care program of such State or political subdivision to make foster care payments to providers of foster care.

(4) Limitation based on number of individuals over the age of 18 In the case of any foster home in which there is a qualified foster care individual who has attained age 19, foster care payments (other than difficulty of care payments) for any period to which such payments relate shall not be excludable from gross income under subsection (a) to the extent such payments are made for more than 5 such qualified foster individuals.


(c) Difficulty of care payments For purposes of this section—
(1) Difficulty of care payments The term “difficulty of care payments” means payments to individuals which are not described in subsection (b)(1)(B)(i), and which—
(A) are compensation for providing the additional care of a qualified foster individual which is— (i) required by reason of a physical, mental, or emotional handicap of such individual with respect to which the State has determined that there is a need for additional compensation, and
(ii) provided in the home of the foster care provider, and


(B) are designated by the payor as compensation described in subparagraph (A).

(2) Limitation based on number of individuals In the case of any foster home, difficulty of care payments for any period to which such payments relate shall not be excludable from gross income under subsection (a) to the extent such payments are made for more than—
(A) 10 qualified foster individuals who have not attained age 19, and
(B) 5 qualified foster individuals not described in subparagraph (A).

[mj77]

Yes, they are exempt in that you are not required to claim them as taxable income, but foster care payments are still concidered child's income (non-taxable) according to the above IRS Publication 501 page 15 and you are required to look to see if you meet the support test criteria before claiming.

[TNParent]

Originally Posted by mj77

Yes, they are exempt in that you are not required to claim them as taxable income, but foster care payments are still concidered child's income (non-taxable) according to the above IRS Publication 501 page 15 and you are required to look to see if you meet the support test criteria before claiming.

Now I am confused...

Sorry, but I do not see anywhere mentioned in publication 501 that foster care payments are to be considered as the child's non-taxable INCOME...

All I see is on page 15: Payments you receive for the support from a foster child of a child placement agency are concidered support provided by the agency. Similarly, payments you receive for the support of a foster child from a state or county are concidered support provided by the state or county.

That would make them payments provided by others (state, agency) for the child's support, right?

Now let's look at the "IRS Worksheet for Determining Support". You would enter "0" on line 1-5, unless your foster child has savings or an actual income (from working at McDonald's or similar). After filling out everything else, you are likely to answer "NO" on line 22. If your foster child meets all the other criteria (residency, etc.), IRS says you stop there.

Which means that line 23, where you would enter the support provided by state or other agencies, never comes into play!

Let me know if I see that wrong...(???)

[mj77]

I know it's confusing--and frustrating as I was initially making the points you were. I think the IRS looks at foster payments as support that is directly linked to the child for their care. Not ALL the foster payment has to be included, to my understanding, just the base rate which is for cost of living. If you get a special rate on top of that, it is usually for time spent working on special needs and doesn't qualify the same way. My dh called the IRS and spoke with John Yen IRS ID #84-20263 who confirmed that we did in fact have to qualify by the support test to claim our foster son and he confirmed everything we could include in determining how much money we spend in a month and it wasn't as hard as I thought. According to the tax expert that Nancy Ashe names, he has also found this to be true.

I didn't think it was spelt out well enough in the IRS docs either, that's why we ended up calling. I would encourage you to do the same. Hopefully next time, they will spell it out for us better. I'll let you know too if I find any docs that are more clear to this.

MJ