Foster Child

[Lion EA]

New client has a foster child placed with them by CT's Dept. of Children & Families since 2019. The CT letter says, "This letter is to confirm that XXX has been residing in the foster home of Mr. & Mrs. YYY since July 23, 2019."

Child for all purposes? Child Tax Credit? Child Care Credit? Dependency? Everything?

The foster parents are in the process of adopting XXX.

[Medlin Software, Dennis]

Could be the family is receiving monetary assistance and the child may be receiving medical benefits. Unlikely the family can show they provide enough to make the child a dependent, unless some sort of unpaid placement. On the other hand, any foster payment is likely not reportable as income. This assumes it is not a business setup, such as a group home of some sort.

The letter may just be a confirmation of the time in placement, which comes in handy showing de facto parent status if the adoption is contested.

Just my personal experiences…

[Lion EA]

Thanx. That gives me questions to ask these clients.

[Margaret CPA in OH]

If they are fostering the child (as it seems) and the child has lived with them for more than half the year - well, see all the requirements for a foster child to be claimed as a dependent.  If a dependent, they are also qualifying for CTC, etc.  One of my clients have fostered children many times over the years but always met the half year or more time until 2021.  Alas, they had 4 children for 4 months so missed out big time for dependency exemption.

I don't know how the time in foster home relates to adoption.  My client did adopt one of the children several years ago.

[TexTaxToo]

There is no requirement that the foster child live with them 6 months if they were placed later in the year.  From Pub 501 https://www.irs.gov/publications/p501#en_US_2021_publink100091910

Quote

This child is considered to have lived with you for more than half of 2021 if your main home was this child's main home for more than half the time since he or she was adopted or placed with you in 2021.

This was clarified in the 2017 proposed regulations on dependency section 1.2-2(c)(4)

https://www.federalregister.gov/documents/2017/01/19/2017-01056/definition-of-dependent

 

Quote

(4) Birth, death, adoption, or placement. If an individual is a member of a household for less than a taxable year as a result of the individual’s birth, death, adoption, or placement with a taxpayer for adoption or in foster care during that year, the requirement that the individual be a member of the
household for more than one-half of the taxable year is satisfied if the individual is a member of the household for more than one-half of the period after the individual’s birth, adoption, or
placement for adoption or in foster care or before the individual’s death.

 

[TexTaxToo]

A slight correction.  The portion of the proposed regs I quoted have to do with qualification for head of household.  The section dealing with qualification for dependency is later in section 1.152-4(d)(2):

https://www.federalregister.gov/d/2017-01056/p-365

Quote

(2) Adopted child or foster child. If, during a taxpayer's taxable year, the taxpayer adopts a child, a child is lawfully placed with a taxpayer for legal adoption by that taxpayer, or an eligible foster child is placed with a taxpayer, the residency test for a qualifying child and the residency requirement under § 1.152-1(a)(2)(iii) for a child who is not a citizen or national of the United States are treated as met if the taxpayer and the child have the same principal place of abode for more than one-half of the portion of the taxable year as required for a qualifying child, or for the entire taxable year as required for a noncitizen, following the placement of the child with the taxpayer.

 

[Medlin Software, Dennis]

As we have seen, the rules are complicated, and have to be read, like most, in a way to get the desired end result if possible.  The rub for 1040 dependency will be any foster care payments and/or medical coverage.  Residency and other items are separate issues.

With adoption sounding like the goal, the parents need to do things such as preserving payments (adoption assistance), preserving medical coverage, preserving/obtaining SSI (if eligible), etc. The first two are negotiated items and not always automatic.  The last is easier done as young as possible, and as close to adoption date as possible. There are many more things which could come up, benefiting the child and family, and there are few who figure out all options their first time.  Most areas have foster/adoptive family support groups which are a great resource.

[TexTaxToo]

The 2017 regs also clarify that government payments to an individual used for support of that individual is support provided by a third party, not support by that individual.  (The exception to this is Social Security benefits which are treated as support by the beneficiary.)

Also, government payments used by the recipient to support another individual is support by the recipient, not support by a third party.  

In other words, government payments to the child are support by a third party, and government payments to the foster parent, if used to support the child, are support by the foster parent.  The support requirement for a qualifying child is simply that the child not provide more than half of their own support - it is unlikely that they do unless the child is receiving Social Security survivor or disability benefits.

See https://www.federalregister.gov/d/2017-01056/p-338

 

[Patrick Michael]

16 hours ago, Medlin Software said:

Could be the family is receiving monetary assistance and the child may be receiving medical benefits. Unlikely the family can show they provide enough to make the child a dependent, unless some sort of unpaid placement. On the other hand, any foster payment is likely not reportable as income. This assumes it is not a business setup, such as a group home of some sort.

Payments from the state are not considered as support from the child, so they do not enter into the calculation for the support test.  As long as the child does not provide over half their support, the foster parents can claim them as a dependent, as long as all the other criteria are met.  

From IRS Pub 501

Example 2. 

You provided $3,000 toward your 10-year-old foster child's support for the year. The state government provided $4,000, which is considered support provided by the state, not by the child. See Support provided by the state (welfare, food benefits, housing, etc.), later. Your foster child didn't provide more than half of her own support for the year.

[Medlin Software, Dennis]

Looks like the verbiage for support test, and the residency time was changed, possibly in 2005. Better news for foster parents.

Our first foster arrived in 88… foster failed twice . Stopped actively fostering after 20 years, but we will still do respite in special cases.