Revenue Administrative Bulletin 1988-28

Approved: May 27, 1988

INDIVIDUAL INCOME TAX - TAXABILITY OF FOSTER CARE PAYMENTS

RAB-88-28. This Bulletin describes the taxability of  "foster care payments" and "difficulty of care payments" received by a foster parent and whether the amounts received are includable in a claimant's household income for the purpose of claiming a homestead property tax credit, a home heating credit or a farmland preservation property tax credit.

Federal Treatment

Section 131(a) of the Internal Revenue Code of 1986 (IRC) excludes, within limitations, from gross income qualified foster care payments received by a foster care provider during the taxable year.

A foster care payment is further defined as any amount paid by a state or political subdivision of a state or by a child placement organization described in section 501(c)(3) and exempt under section 501(a) of the IRC.

The foster care payment is paid to cover the expense of caring for a qualified foster child. A difficulty of care payment is paid to a foster parent for providing additional care of a physically, mentally, or emotionally handicapped foster child.

A qualified foster child is a child who has not attained the age of 19 and is placed by an agency of the state in a foster home.

Michigan Income Tax Treatment

Taxability of Foster Care Payments

Taxable income is defined in MCL 206.30(l) as adjusted gross income as determined in the Internal Revenue Code subject to certain adjustments.

Foster care payments, including difficulty of care payments, are not taxable to the extent these payments are excludable from adjusted gross income under Section 131 of the IRC.

Foster care payments that are not excludable from taxation under Section 131 will be included in adjusted gross income as compensation for personal services. These payments are taxable to a resident of this State and to a nonresident if the personal services are performed in this State.

Household Income

Household income is defined in MCL 206.508(4) as "...all income received by all persons of a household in a tax year while members of a household."

"Income" is further defined in MCL 206.510(l) as the sum of federal adjusted gross income as determined in the Internal Revenue Code plus all income specifically excluded or exempt from the computations of the federal adjusted gross income plus carrybacks or carryforwards of net operating losses or capital losses.

Although certain foster care payments are specifically excluded from gross income under Section 131 of the IRC, these amounts are required to be included in household income for the purpose of determining a homestead property tax credit, a home heating credit or a farmland property tax credit, unless otherwise excluded in MCL 206.510(l) or Department of Treasury Rule, 1979 AC, R 206.4.