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Pennsylvania
Adoptive & Foster Families

Taproot issue 44 - May 2003

Federal Tax Benefits for Foster and Adoptive Parents And Kinship Caregivers: 2002 Tax Year Guide

Tax Exempt Payments

As resource families, most payments you receive are excluded from taxable income and are not reported on your tax return. These include

• cost of care reimbursements;

• specialized or difficulty of care payments;

• most other reimbursements from government or private child welfare agencies;

• child-only cash assistance (referred to in many states as “TANF” or Temporary Assistance to Needy Families); and

• Food Stamp Program.

Some payments are treated as taxable income, when a foster parent:

• cares for more than ten children;

• is paid to keep a bed available even if it is not used;

• operates a group home and is paid for his or her time;

• cares for more than five persons over the age of 19.

NEW in 2002: in previous years, payments from for-profit child welfare agencies were considered taxable. Effective in 2002, payments from for-profit child welfare agencies operating under contract with a state or local government agency are tax exempt to the same extent that payments from non-profit and government agencies are tax-exempt.

If a foster parent receives taxable payments, the agency issues a Form 1099 to both the foster parent and the IRS. The gross income must be reported on the tax return. All expenses incurred in caring for the child are deducted to arrive at net income. For more information, see IRS Publication 587, Business Use of Your Home.

Adoption assistance payments and related subsidies for childcare or other special needs, that are paid by government child welfare agencies for adopted children, are also excluded from taxable income. These payments should not be reported on your tax return.

TIP If a resource family receives a 1099 in error, contact the issuing agency and ask for a corrected 1099. Also, be sure to advise your tax advisor.

Deductions or Credits

There are two basic kinds of tax benefits, deductions and credits.

1. A deduction is subtracted from taxable income, and is generally less valuable to a taxpayer. The value of a deduction is based on the marginal tax rate of the taxpayer.

Example: A tax deduction of $1,000

Taxpayer A, in the 15% tax bracket, will save $150 (15% of $1,000)

Taxpayer B, in the 27% tax bracket, will save $270 (27% of $1,000)

2. A tax credit is a dollar for dollar reduction in tax liability.

Example: A tax credit of $1,000. Every taxpayer will have his or her tax bill reduced by $1,000

However, because tax laws and procedures are very complicated, other factors can influence the ultimate value to the taxpayer. Most tax credits are non-refundable. This means that the credit only reduces tax liability, and when tax liability reaches zero, any balance left from the credit is lost.

Some tax credits are refundable, which means the taxpayer receives a refund for the full credit, even if no tax is due. The Earned Income Tax Credit (EITC) and the child tax credit are examples of refundable credits.

The full guide is available on the web site of the Casey Family Program National Center for Resource Family Support at: www.casey.org/cnc