Foster Care Payments Exempt from Tax

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If you are caring for an elderly parent and being paid under a foster care program, that income paid to you may be exempt from tax.

When someone is caring for an elderly parent who is disabled and unable to care for themselves the income reported on a W-2 for that care is exempt from tax.  The income must be qualified under a State or political subdivision foster care program.

The caregiver should probably claim 9 exemptions to prevent tax from being withheld, otherwise it will be refunded or credited towards other tax when the return is filed for the year.

This was decided in early 2014.  Taxpayers can go back and amend up to three tax years that are still open for amendment.

The income is reported as W-2 income along with any withholdings thereon.  Then on the Form 1040, line 21 you put in a negative amount equal to the gross wages on the W-2 and a notation to see Statement 1.  Then attach a Statement 1 to the return and list on a line “Notice 2014-7” and the amount to the right of that.

References:

Internal Revenue Bulletin 2014-4

Notice 2014-7



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