Adoption and Foster Taxes: What You May Not Know This Tax Season

Tax season is here, and with the April 15th deadline fast approaching, many adoptive and foster families may be wondering how their unique circumstances impact their taxes. If you’re an adoptive parent or foster caregiver you might be eligible for deductions, tax credits, and benefits that you didn’t even realize existed. This article will explore key tax considerations and provide valuable insights as we approach tax season this year.

Take a moment to pause and take a deep breath. Amid the whirlwind of emotions and the endless paperwork, the decision to welcome a child into your home and heart is both profound and deeply meaningful. Collect your financial documents, and together, we’ll explore some details to help you better understand what you may need to know about the upcoming tax season.

Key Tax Breaks for Adoptive Parents

Last year, you adopted a child, and now your family feels whole and complete. Did you know that the IRS provides tax credits and reimbursements to support adoptive families?

The Adoption Tax Credit

One of the most significant benefits available to adoptive parents is the Adoption Tax Credit, which can help offset some of the costs associated with adoption.  If eligible, you and your family can claim the Adoption Credit on your federal income taxes for up to $16,810 in qualified expenses for 2024.  To see if you are eligible, click here.

• Qualified Expenses include adoption fees, court costs, attorney fees, home study costs, and travel expenses.

• The credit is non-refundable, meaning you can use it to reduce your tax liability to zero, but you won’t receive a cash refund if your credit amount exceeds your tax liability.
• You may qualify if your modified adjusted gross income is $252,150 or less in 2024. The credit is reduced for incomes between $252,151 and $292,150 and unavailable if your income exceeds $292,150.

State-Specific Incentives

Pennsylvania does not allow taxpayers to take a credit on their tax returns for credits deducted on the federal return.  The table below lists may of the credits not allowed for Pennsylvania Personal Income Tax, which are allowed for federal income tax purposes.

What Isn’t a Qualified Expense?

The adoption tax credit excludes certain expenses, such as costs related to adopting stepchildren, surrogate parenting, and any expenses reimbursed by your employer or other sources. Additionally, it does not cover expenses already claimed under another federal tax provision or reimbursed through state, local, or federal programs.

What Foster Families Should Know About Tax Season

While fostering is typically reimbursed rather than eligible for tax credits like adoption, there are still several tax benefits foster caregivers should consider.

Tax-Free Foster Payments

The reimbursements foster parents receive from state or local agencies are not taxable as long as they meet the following conditions:

• The payments are made to help care for a foster child.

• The foster care arrangement is licensed or approved by the state or a qualified organization.

Claiming Foster Children as Dependents

You may be able to claim a foster child as a dependent on your tax return if you meet certain criteria under the “Qualifying Child” guidelines. This includes the child living with you for more than six months of the year and you providing more than half of their financial support.

Earned Income Tax Credit (EITC)

Foster parents who provide care for children in their homes might qualify for the Earned Income Tax Credit (EITC). This credit is based on your income, family size, and filing status and can add a significant boost to your tax refund.

Child and Dependent Care Credit

If you’ve incurred expenses for childcare while raising your foster children, you may be eligible for the Child and Dependent Care Credit, which helps cover the cost of daycares, in-home care providers, or after-school programs.

Resources for Navigating Tax Season

Dealing with taxes can feel overwhelming, but you don’t have to go through it alone. There are plenty of resources available to help adoptive and foster families make informed decisions.

Important IRS Forms for Adoption and Foster Families

• Form 8839 – Qualifying for the Adoption Tax Credit

• Publication 501 – Guidelines for Dependents and Filing Statuses

How Can Families United Network Help?

Navigating tax-related benefits can be complicated, especially for adoptive and foster families. Families United Network can connect you with tax professionals specializing in this area to make the process a little bit easier. By utilizing the right credits, deductions, and professional guidance, you can maximize your refund and better support your family.