Taxation of Foster Care Payments

November 30, 2011

As the provider of foster care, you may be entitled to exclude certain payments for the care of "qualified foster individuals" from your gross income. A qualified foster individual is a person who is living in a foster family home after having been placed there either by a governmental agency or by a qualified foster care agency.

Under current tax law, payments you receive either from a governmental agency or from a qualified foster care placement agency for providing care are generally not included in income. The exclusion for foster care payments is compensation for the provision of foster care, not a reimbursement of qualified foster care expenses. Therefore, you do not have to maintain records to prove the extent to which the payments represented reimbursement of actual expenses.

This exclusion only applies to care provided within your home. Payments received for care in any other facility are not excluded from income.

Although prior tax laws made payments for the care of those over the age of 19 taxable, there is no longer any age restriction. Therefore, foster care providers may now exclude payments made by tax-exempt and for-profit placement agencies on behalf of individuals who are over the age of 18 at the time of their placement. However, you are not entitled to exclude from income payments for the care of more than five individuals over the age of 18.

Difficulty-of-care payments are compensation for providing additional care for qualified foster individuals if the payments are necessitated by the physical, mental, or emotional needs of the individual after the state has determined that the foster care provider needs additional compensation in order to deal with the individual's handicaps. These difficulty-of-care payments are also generally excluded from gross income. However, if the payments are received for more than 10 qualified foster individuals under age 19 or for more than five qualified foster individuals over the age of 18, they must be included in your income.

If you receive payments to maintain space in your home for emergency foster care, you must include these payments in gross income. The IRS considers you to be a self-employed person in business as a provider of foster care if you receive foster care payments that must be included in your gross income.