J.K. Lasser's 1001 Deductions and Tax Breaks 2022. Barbara Weltman
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the adoption process, hiring a lawyer and paying a retainer of $3,000. In 2020, the lawyer helps you work with an authorized adoption agency to which you pay a fee of $10,000 to adopt your daughter, a U.S. resident. The child is placed with you at that time. In 2021, you pay the lawyer an additional $4,000 and the adoption becomes final in this year. You may not claim any credit in 2020. In 2021, you may claim a credit up to $14,440, comprised of $13,000 [retainer and adoption fee] paid in 2020 and $1,610 of the $4,000 additional attorney's fee paid in 2021. The excess expenses of $2,390 [$4,000−$1,610]) are not carried over and cannot be used in the future.
If your employer paid or reimbursed you for qualified expenses, you must also complete this form to figure excludable benefits.
Distributions from qualified retirement plans for adoption expenses are reported to you on Form 1099‐R and entered on line 5b of Form 1040 or 1040‐SR. You must also file Form 5329 to claim the penalty exception.
Foster Care
Taxpayers who care for children in foster care and receive funds for expenses may not be taxed on those funds. Instead, they may be able to exclude the payments they receive from income.
Benefit
Exclusion for foster care payments. If you receive foster care payments to care for a child placed with you by a state or local agency or a tax‐exempt foster care placement agency, you are not taxed on those payments. They are fully excludable; there is no dollar limit.
Qualified payments include payments for the provision of foster care. They also include difficulty‐of‐care payments to account for the additional care required for a child with physical, mental, or emotional handicaps. Payments under a state Medicaid Home and Community‐Based Services Waiver (Medicaid waiver) program are treated as difficulty‐of‐care payments.
However, the exclusion for foster care payments is limited to payments received for 5 qualifying individuals who are over age 18. The exclusion for difficulty‐of‐care payments is limited to payments received for 10 qualifying individuals who are over age 18. There are no limits on the number of children age 18 or under for whom the exclusion may be claimed.
Deduction for out‐of‐pocket costs. See Chapter 6.
Condition
Foster care payments include only those made by a state or local government or qualified foster care placement agency for the care of a qualified foster child or a difficulty‐of‐care payment. Also, you and the foster child must live in the same home.
Planning Tip
If you are a foster care parent dealing with a private agency, make sure the placement entitles you to exclude payments received for the care of the child.
Pitfalls
Payments received from private agencies that are not tax‐exempt entities, even though licensed by the state, are not excludable from income.
Payments made to a child's biological parent cannot be excluded, even if labeled “foster care payment” because such parent is never a foster parent.
Where to Claim the Exclusion
Foster care payments are not reported on the return if they are excludable. If you care for more than the allowable number of children over age 18, you must include the payments in income. Report this as “other income” on your return.
Child Support
Divorced or separated parents may be ordered by a court to make support payments for a child of the marriage. Even an unwed parent may be instructed to support his or her child. The recipient of child support payments, typically the parent with whom the child resides, is not taxed on these payments. (The parent making the payments cannot deduct them, but paying child support may entitle the parent to other tax write‐offs discussed throughout this chapter.)
Benefit
Child support payments are not taxable to the child, nor to the parent who receives them on behalf of the child. There is no dollar limit to this benefit. It does not matter whether child support payments are made pursuant to a divorce decree or separation agreement made before 2019 or after 2018 (when the rules for alimony payments were changed).
Conditions
Payments for child support should be fixed. If they are set by a decree of divorce or separate maintenance or a separation agreement, they are considered to be fixed.
In addition, if payments made to a parent will be reduced or terminated upon a contingency related to the child, then those payments are treated as being fixed for child support. Contingencies for this purpose include:
Reaching the age of majority (generally age 18 or 21, depending on the law in your state)
Leaving school
Marrying
Entering military service
Moving out of the custodial parent's home
Starting to work and/or attaining a set income level
Planning Tip
If a parent is required to pay both alimony and child support under a pre‐2019 divorce decree and makes a single payment that is less than the total amount due, the first dollars are considered tax‐free child support. This is relevant if the alimony is pursuant to a divorce decree or separation agreement executed before 2021 under which alimony payments are deductible.
Example
Ed owes his former spouse $1,000 each month to cover alimony of $600 and child support of $400. Assume they were divorced several years ago. In March 2021, Ed pays only $500. Of this amount, $400 is treated as child support; $100 is treated as alimony.
Pitfalls
The parent who makes child support payments cannot deduct them. They are not considered to be part of deductible alimony payments where applicable (explained in the next section).
If a reduction in child support payments to a parent is not specifically tied to the child's age of majority but is scheduled to occur within 6 months before or after such date, the reduction is treated as if it was tied to the child. This means that the amount subject to reduction is viewed as child support and not as deductible alimony if a pre‐2019 divorce decree or separation agreement is involved. The same rule applies if you are making payments on behalf of more than one child and there are at least 2 reductions, each of which is within a year of a child's reaching the age of majority.
If you are due a refund of federal income tax because you overpaid it through withholding or estimated taxes, you won't receive it if you are delinquent on your child support payments. The IRS is authorized to divert your refund to the parent owed the child support payments as long as the state provides notice to you and a procedure you can follow to contest this action.
Where to Claim the Exclusion
Child support payments received are not reported on the return.
Alimony
Taxpayers