Deducting Expenses for foster kids

[Anonymous]

I have read a lot of IRS info and various web pages on tax options while caring for foster kids.  I can’t find a specific answer to my question/situation. I will start with a summary of some facts.

Foster kids can be claimed as a dependent.  We are unable to do that because the foster kids were not in our care for more than 6 months of 2020.

Payments received for caring for foster kids are not taxable income.  We understand that and have not included that in our income.

Expenses for buying food, clothes, etc. for foster kids can be considered deductible (a charitable gift) if the entity that you are providing the foster care under is able to receive donations that would be treated as tax deducible.  Our foster care system qualifies under the definition of being able to make tax deductible donations to them.

We bought food, clothes, diapers, etc. that we can itemize that were purchased for the foster kids.  Since we did receive non taxable payments for being foster parents, can we also claim the charitable deduction for our expenses as well?

Thanks in advance

[AmyC · Accepted solution]

It depends. You see, if the state is paying the majority of the child's expenses, then you do not qualify to count them as dependents moving forward. The intention is the state pays some for the child and the foster parent pays more to be able to show they provided over half the support. If you are in the business of being a foster parent, additional expenses are not deductible. If you are not in the business and have no plan to continue or claim, then you may have deductible expenses that can be claimed as a charitable contribution.

Publication 501 (2020), Dependents, Standard Deduction states: 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 aren't 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 aren't considered support you provided. For more information about the deduction for charitable contributions, see Pub. 526. If your unreimbursed expenses aren't deductible as charitable contributions, they may qualify as support you provided.

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

[Anonymous]

Thanks.  We knew they weren't dependents since they were only with us for 2 months.  This was the first document I saw that clearly said that only expenses above the reimbursement would potentially be deductible.

[Opus 17 · Accepted solution]

@Anonymous 

I don’t want you to be misled by the document that Amy posted. It mainly relates to how the support test is applied toward counting the foster children as dependents. There are different support tests for different kinds of dependents and the document that Amy quoted discusses how to determine what counts as “support“.

If you operate a foster care home with a large number of children receiving multiple state payments, you may be considered a business. You must report the foster payments as business income and you can deduct your business expenses, like any other business. This would all go on schedule C.

If you take in one or two foster children for whatever reason as long as it is not a business, then any support payments provided by the state are not taxable income and your expenses in caring for the foster children are not deductible, any more than you would be able to deduct the cost for food or clothing for your own biological children.

I would be very dubious and very cautious about treating your out-of-pocket expenses as a charitable donation. The IRS is very clear that you can’t take a charitable deduction for expenses that primarily benefit yourself or your family. So if the reason that you are taking in a foster child is because they are a relative whose parent is unable to care for them, or because you are interested in adopting, then you are benefiting yourself or your family and your excess expenses would not be deductible, even if the placement was managed by a qualified charity.  The IRS says you may deduct your excess costs as a contribution to a qualified charity, if the children were placed in your home by a qualified charity and if the reason for accepying the children was primarily to benefit the qualified charity.  You would need some kind of a statement or letter or receipt from the charity attesting to this to prove in case of audit that you accepted the foster children to benefit the charity.  And remember, this would be an itemized deduction on schedule A, so you may not benefit from listing the expenses unless your itemized deductions are already more than your standard deduction.  

This is what IRS publication 526 has to say about foster parents.

Foster parents.

You may be able to deduct as a charitable contribution some of the costs of being a foster parent (foster care provider) if you have no profit motive in providing the foster care and aren't, in fact, making a profit. A qualified organization must select the individuals you take into your home for foster care.

You can deduct expenses that meet both of the following requirements.

1. They are unreimbursed out-of-pocket expenses to feed, clothe, and care for the foster child.

2. They are incurred primarily to benefit the qualified organization.

Unreimbursed expenses that you can't deduct as charitable contributions may be considered support provided by you in determining whether you can claim the foster child as a dependent. For details, see Pub. 501, Dependents, Standard Deduction, and Filing Information.

Example.

You cared for a foster child because you wanted to adopt her, not to benefit the agency that placed her in your home. Your unreimbursed expenses aren't deductible as charitable contributions.

[Anonymous]

Thanks for the very detailed response.  It is very helpful.  My summary assessment is that only expenses that exceeded reimbursement could ever be considered as deductible.  And then it would have to meet a variety of other tests.   Generally our expenses do not exceed the reimbursement so the other tests aren't really necessary.

FWIW, we are a couple who volunteered to be foster parents strictly to help out kids who need a safe place to live while the adults in their lives (including the social workers, etc.) work out a permanent safe living arrangement for them.  No family connections, no adoption, not a "professional" foster parent.  The kids were with us for less than 6 months in 2020 so not eligible as dependents. We work though the county health and human services which qualifies as an entity for charitable donations.  But we are not going to worry about any potential small deduction if we track every expense to see if it exceeds reimbursement.  We volunteered to help kids and our future generations.  I just wanted to verify I wasn't leaving any potential tax benefit on the table as an afterthought.