If you 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 available for supporting a child. 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 tax law tests. Each exemption for 2014 is $3,950.
Similarly, you may be in line for one or more of these tax benefits when you file your 2014 return next year.
- 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 rules. For 2014, the deduction for medical expenses is generally limited to the excess above 10% of adjusted gross income (AGI).
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.