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Introduction To The Foster Care Tax Equity Issue

All Foster Care Payments Should Receive The Same Income Tax Treatment

Present Law Results in Disparate Income Tax Treatment of Foster Care Payments

Foster care providers are permitted to deduct payments for caring for foster individuals if detailed expense records are maintained to support such deductions.

However, in lieu of extensive record keeping, Section 131 of the Internal Revenue Code permits certain foster care providers to exclude from taxable income payments they receive to care for foster individuals. Who is eligible for this exclusion depends upon a complicated analysis of three factors: the age of the foster care individual, the type of foster care placement entity and the source of the foster care payments.

For children under 19 years old, Section 131 permits foster care providers to exclude payments from taxable income only when a State, a political subdivision thereof, or a charitable tax exempt placement agency places the individual and makes the foster care payments.

For adults age 19 years and older, Section 131 permits foster care providers to exclude payments from taxable income only when a State or political subdivision thereof places the individual and makes the foster care payments.

S. 670 and H.R. 1194 Would Simplifv the Treatment of Foster Care Payments

S. 670 and H.R. 1194, both with the same content and simultaneously introduced by Senator Jeffords and Representative Lewis, respectively, would simplify the current rules for foster care payments. The bills would amend Section 13 1 to allow for the exclusion of foster care payments paid to families, regardless of the age of the foster care individual or whether the State or political subdivision works with a private agency to make the placement and payments. To ensure appropriate oversight, the bills require the placement agency to be either licensed or certified by a State or political subdivision thereof.

The proposed amendment in S. 670 and H.R. 1194 was included in the House, Senate, and Conference Committee versions of the Taxpayer Refund and Relief Act of 1999, H.R. 2488, the major tax bill passed by the Congress in August 1999. Under the Conference Report, the provision would be effective prospectively, for taxable years beginning after December 31,1999.

Foster Care Payments Should Receive Uniform Income Tax Treatment

States and localities across the United States are increasingly relying on private agencies to arrange for foster care services for children and adults. However, foster care providers are reluctant to accept placements and payments by such private agencies when current law requires the provider to include such payments as taxable income and maintain extensive records to justify tax deductions. In contrast, if the foster care placements and payments are made by a State or political subdivision thereof, current law permits the provider to exclude such payments from taxable income. See Micorescu v. Commissioner, T.C. Memo 1998-398. Many foster care providers are thus deterred by current tax law from using private placement agencies, thereby reducing the availability of care alternatives for individuals requiring assistance. No rational basis exists for the current disparate treatment of payments received by foster care providers. S. 670 and H.R. 1194 remedy the problem.

EXCLUDABILITY OF FOSTER CARE PAYMENTS FROM INCOME UNDER SECTION 131 AS CURRENTLY IN EFFECT