Child Exemptions

• Generally, parents who claim children as dependents on their tax return--including foster children, receive a $950 exemption on their federal income taxes, as of late 2010. In order to qualify for the exemption, though, the child must have lived in the home for more than half of the tax year, in most circumstances, and must be under age 19. The child cannot have provided more than half of his or her support during the year. Additionally, the child must be a U.S. citizen or national, or a resident of the U.S., Canada or Mexico.
  
  

Child Tax Credit

• The Child Tax Credit reduces your tax bill by $1,000 for each qualifying child you can claim under age 17. The IRS specifically provides for foster child eligibility for the Child Tax Credit. The child must have lived with you for at least half the year and you must claim the child as a dependent. However, there are phase-out limits based on your income. If you are married and file jointly, the credit begins to phase out with an annual joint income of $110,000.
  
  

Claiming Dependents

• You must file a Form 1040 or 1040 A in order to claim child dependents, including foster children. You cannot use Form 1040EZ to claim dependents. You will need to fill in the child's Social Security Number in the appropriate block on the tax return.
  
  

Education-Related Tax Deductions

• If you are contributing to a college savings plan for the child, you also can deduct contributions to a Section 529 plan. There is no income restrictions on who can make these contributions.
  
  

Adoption Tax Credit

• If you decide to adopt a child or children, your family may be eligible for the Adoption Credit. This will allow you to exclude up to $4,000 in adoption-related expenses, and gain you a tax credit of up to $10,000. To claim this credit, fill out IRS Form 8839, Qualified Adoption Expenses