Certain Foster Care Payment

[Thad]

I have read several threads at this site without much understanding. Today, I gave a Tax Talk and a potential client gave me a document, entitled, Section 131. Certain Foster Care Payments, IRC, Title 26, Subtitle A, Chapter 1, Subchapter B, Part III, Section 131. The bottom line is that the statue states that gross income shall not include amounts received by a foster care provider during the taxable year as qualified foster care payments. The article goes on to say that the term qualified foster care payment means any paymebnt made pursuant to as foster care program of a State or political subdivision...

Section 131 is buried deep in IRC and this new information threw me for a huge loop. I see several issues with this new enlightment. If it is the only income that the foster care provider is getting, how am I going to enter the information on the tax return. Apparently, the source provider is an Independent Contractor,...so what about the Sch-C and Sch-SE? Any solid information regarding this matter is greatly needed. Thanks.

[Koss]

Foster Care Payments

Some payments to foster care providers are taxable, and some are not.

See page 93 of Publication 17, at the top of the third column.

Here's the text of IRC 131. It's not really that complicated once you read it a couple times. Pub. 17 actually does a pretty good job of translating it into plain English.

http://www.fourmilab.ch/uscode/26usc/www/t26-A-1-B-III-131.html

"Difficulty of care" payments are quite common, even for foster children who are not physically disabled. Many, many foster children have serious psychological problems, and these children qualify for these extra payments.

BMK

[Thad]

A Hearty Thanks

Mr. BMK,

Thanks for the guidance. I have read both, Pub-17 and the IRC pertaining to this issue. It just seem very odd to me that whatever amount of money that is reported on a 1099-MISC, it just vanish in the air and there's no paper trail.

A further thought is that since the 1099-MISC is not reported, then there is no Sch-C, nor Sch SE, thus the person can not claim to be an Independent Contractor.

Again, thanks for you helpfulness.

[Gary2]

Mr. BMK,

Thanks for the guidance. I have read both, Pub-17 and the IRC pertaining to this issue. It just seem very odd to me that whatever amount of money that is reported on a 1099-MISC, it just vanish in the air and there's no paper trail.

A further thought is that since the 1099-MISC is not reported, then there is no Sch-C, nor Sch SE, thus the person can not claim to be an Independent Contractor.

If you did have such a 1099-MISC with a box 7 entry, and were convinced that it qualified for the exclusion, then couldn't you preparer a Sch. C with the amount treated as a return/allowance, to zero it out, along with a note explaining why? I'm not sure it's necessary, but it would at least maintain the paper trail in a reasonable way.

[Koss]

Taxable or Nontaxable

Thad wrote:

A further thought is that since the 1099-MISC is not reported, then there is no Sch-C, nor Sch SE, thus the person can not claim to be an Independent Contractor.

Just because there is no 1099-MISC does not mean that the income should not be reported. And it doesn't mean that the person isn't self-employed. As to whether they are an indpendent contractor, that's really just a word game. Self-employment is self-employment, regardless of what you call it.

It is not the reporting document or information return that determines the taxation of an item; rather, it is the nature and character of the payment that determines its treatment under the tax law.

If, based on the criteria set forth in IRC 131, the payments are taxable, then they should be reported on Schedule C.

BMK

[TaxmannEA]

One problem that I have encountered with this is that some agencies just cannot resist issuing a 1099 MISC whe it is not required. As the 1099 is issued for payments that are includable in the reipient's gross income it follows that payments that are not includable should not have a 1099 issued. You have to go with the facts in each case.

[Koss]

Form 1099-MISC

Yes, but in this context, the question of whether the income is taxable hinges on how many foster children the person is caring for.

The agency may not know, and may not be able to determine whether the income is taxable.

BMK