Court Rules on Taxation of Foster Care Payments

I don’t usually consider the taxability of foster care payments, but I discovered that  § 131 of the Internal Revenue Code addresses this issue.  In addition, the U.S. District Court for the Southern District of Ohio , on January 6, 2014, addressed this very issue in Ray v. U.S.

1) Exclusion of Foster Care Payments for Foster Care Providers in General:  § 131(a) excludes “qualified foster care payments” from the gross income of a foster care provider.  § 131(b)  provides that a “qualified foster care payment” is made pursuant to a foster care program of a state or political subdivision of it.  It must be paid by the state or political subdivision of it or by a qualified foster care placement agency to the foster care provider for caring for a “qualified foster individual” in the qualified foster care provider’s home or a “difficult of care payment” (because of physical, mental, or emotional handicap of the qualified foster individual).  See § 131(c).  A “qualified foster individual” is an individual who lives in a foster family home and was placed there by an agency of the state or a political subdivision of it or an entity designated by the state or a political subdivision of it.

2) Ray v. U.S.

-Case Facts: Taxpayer husband and wife live with, and care for, their 30-year-old son, who is severely handicapped.  When the son turned 18, taxpayer wife was appointed his legal guardian.   Since the son turned 18, his care has been managed by a county agency.  Taxpayer wife receives compensation from Ohio for the care she provides the son.

-The court addressed whether the exclusion under § 131 applies if the taxpayer providing care is the biological parent or guardian of a recipient who is older than age 18.  The court held that because the taxpayer is the guardian of the individual receiving care, and thus owed a legal duty to provide care for him, the taxpayer’s provision of care cannot be characterized as “foster care.”  The court further noted that the relationship is not one of foster care because the recipient of care has not been removed from the care of his guardian.


Want to further discuss these issues?  Contact me at 954-944-3929 or nrumbak@rumbaklaw.com.

*This document contains legal information, but does not contain legal advice.

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