If you’ve decided to take in a child under a foster care arrangement, the payments you receive from the government or other qualified agency are generally tax-free. But the tax breaks don’t stop there for generous foster parents.
Strategy: Claim the same tax benefits that are available if the child was your natural-born kid. For instance, if a foster child lives with you for more than half the year, you’re entitled to an extra dependency exemption if you meet the other tax law tests. Each exemption for 2011 is $3,700.
Similarly, you may be in line for one or more of these tax benefits in 2011:
- The dependent care credit for children under age 13
- The earned income credit
- The child tax credit
- Medical expense deductions paid on behalf of the child (subject to the usual 7.5%-of-AGI threshold).
Tip: You can also claim a charitable deduction for your out-of-pocket expenditures for feeding, clothing and caring for a foster child if this benefits a qualified tax-exempt organization.