What tax credits can foster parents claim for a child placed with them midyear?

Question of the week: My clients are caring for a foster child placed with them around midyear. Can they claim him as a dependent and for the child tax credit?

December 16, 2020

Q. Can taxpayers claim the child tax credit for a foster child placed with them in July?

My clients Sheldon and Amy have been caring for a three-year old foster child this year whom they may eventually adopt. Barry was officially placed in their full-time care in July by our state’s social services department. Before that, he did stay with them for a few weeks but the information we have is limited. We know that he was in and out of his mother’s home and foster homes in the early part of the year until he was removed from her home by court order. Sheldon and Amy want to claim Barry as their dependent. Their income is too high for the EIC but they’re eligible for the full child tax credit. They receive a small stipend from the foster care agency but otherwise provide nearly all of Barry’s support. Can my clients claim their foster child as their dependent?

A. Ability to claim credits depends on whether the foster child qualifies as a dependent under the qualifying child or qualifying relative rules.

Possibly, but they will need to get more information to determine if this child is your clients’ dependent. Barry was legally placed with Sheldon and Amy by an authorized placement agency. While it’s clear that he is their eligible foster child, which satisfies the relationship test for a qualifying child or qualifying relative, there are other tests at issue that must be resolved.

Here, we’ll discuss the tests that appear to be in question for this family and assume the other tests are met. To be treated as your clients’ dependent Barry must pass all qualifying child or all qualifying relative tests. See “Overview of the Rules for Claiming a Dependent” in IRS Pub. 501, Dependents, Standard Deduction, and Filing Information for the full list.

Is this child a qualifying child? Consider the residency test.

If your clients are able to claim Barry as their dependent qualifying child in 2020, they would be eligible for the child tax credit and for an additional recovery rebate credit (economic impact payment) of $500.

The relevant issue is whether Barry meets the qualifying child residency test which requires him to live with Sheldon and Amy more than half the year. You’ve stated that Barry stayed with them a few weeks before his official placement which was some date in July. Your clients will need to supply more details about when the official placement occurred and when he started living in their home prior to that.

For 2020, which is a leap year, Barry would have to live with your clients more than 183 days to meet the residency test. As examples, it could be that Barry started living with your clients at the end of May and stayed with them continuously before an early July placement, and so easily meets the residency test. Or he may have had just a few sporadic visits during July before a late July placement, which means the residency test is probably not met and Barry is not your clients’ qualifying child. If that’s the case, you’d next determine if Barry is their qualifying relative.

Is this child a qualifying relative? Consider the “not a qualifying child of another taxpayer” and the support tests.

If your clients are able to claim Barry as their qualifying relative, they’d be eligible for the $500 credit for other dependents but not for the child tax credit or recovery rebate credit, because both of these credits are available only for qualifying children. See the recovery rebate credit Qualifying Child Requirements for more information.

Barry wouldn’t have to live with Sheldon and Amy any particular amount of time to be their qualifying relative, but there are two crucial qualifying relative tests to consider here: the “not a qualifying child of another taxpayer” and the support tests. Just as with the residency test, you’ll need to learn some details about his midyear placement and what happened in the early part of the year. Your clients should have most of the information and the agency should be able to supply other needed details.

Barry cannot be treated as a qualifying relative if he is a qualifying child of another taxpayer. Even though he spent time in foster homes, he could be treated as only temporarily absent from his mother’s home until the court order permanently removing him from her home occurred. If he meets the residency test with respect to his mother, then it’s likely that he is her qualifying child. Although the information may be more difficult to obtain, also consider whether she is a “taxpayer.” If she has no return filing requirement and does not file a return (except to get a refund of all withheld taxes) she is not a taxpayer and Barry is not a “qualifying child of another taxpayer.”

Note that even if Barry is not a qualifying child of his mother it doesn’t necessarily follow that he is your clients’ qualifying child as it could be that he doesn’t meet the residency test for any taxpayer.

Next at issue is the support test. Even though Sheldon and Amy provided most of his support once he was officially placed with them, the test requires them to provide over half of his support for the entire tax year. It is best to complete a support worksheet to determine if this test is met. Any support provided by the state is third party support.

When foster placements occur in the second half of the year it often winds up that nobody can claim the child that year. If Barry continues to live with Sheldon and Amy for most of 2021, they will likely be able to claim him as their dependent next year.

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