Foster Care Tax Credit Act Offers $850 Break, But Agencies Face New IRS Reporting Rules Starting 2025

The newly proposed Foster Care Tax Credit Act sets up a targeted financial incentive aimed squarely at families who open their homes to foster children. Starting in 2025, if you host a qualifying foster child under the age of 17 for at least one month (defined as 15+ days), you could claim a new federal income tax credit worth $850 (Section 36C).

This isn't a replacement for the standard Child Tax Credit (CTC); it’s an alternative. If you want to claim this $850 credit for a specific foster child, you have to elect not to take the standard CTC for that same child. This means families need to do the math to see which benefit is better—$850 or the larger CTC, depending on their situation. For example, a family fostering a child for a few months might find the $850 credit a straightforward and valuable boost, especially since the bill mandates that the Department of Health and Human Services (HHS) and Treasury step up outreach to make sure foster families know about all available tax benefits.

The Income Check: Who Gets the Full $850?

Like many tax breaks, this credit starts to shrink for higher earners. The bill establishes clear income thresholds for the phase-out: $250,000 for those filing jointly, $150,000 for single filers, and $125,000 for married filers filing separately. Once your Modified Adjusted Gross Income (MAGI) crosses that line, the $850 credit begins to disappear. The phase-out calculation is a bit technical, reducing the credit proportionally over a $17,000 income range above the threshold. This means if you’re a high earner, the benefit might be significantly reduced or eliminated entirely.

Crucially, the bill introduces severe penalties for improper claims. If the IRS determines you claimed this credit fraudulently, you are banned from claiming it for the next 10 years. If the claim was due to reckless or intentional disregard of the rules, you’re blocked for two years. This shows the Treasury Department is serious about protecting the integrity of this new program.

New Paperwork for Placement Agencies

While the credit is a win for foster parents, it dumps a significant new administrative load onto state and local foster care agencies and courts. The bill mandates that any authorized placement agency must report detailed information directly to the IRS (Section 6039K). This report must include the foster parents' name, address, Taxpayer Identification Number (TIN), the child's name, and the exact dates of the placement. Agencies must also provide a written statement containing all this information to the foster parents by January 31st of the following year.

Think of the social worker or court clerk who now has to manage and transmit sensitive taxpayer data to the federal government. This is a massive new data-reporting requirement that will require new systems and training, especially considering the high turnover and heavy caseloads already common in child welfare services. Any hiccup in this reporting could cause problems for foster parents trying to claim their $850 credit.

Studying the Short-Term Stress

Finally, the bill acknowledges a specific pain point for many foster families: the financial and logistical stress of emergency and short-term placements. Often, a child might stay for only a few days or less than a week, potentially requiring the family to scramble for supplies and rearrange schedules without much notice. Section 3 mandates that HHS and the Treasury conduct a study on the costs and financial strain placed on families who take in repeated emergency placements (defined as less than one week) and the difficulty agencies have verifying these quick stays. This study, due to Congress within one year, is a smart move that could lead to even more targeted support down the road, recognizing that even a few days of care can be costly and disruptive for a family.