Is Foster Care Income Taxable? Rules, Credits, and Deductions

Foster care income is generally not taxable. Payments you receive from a state, a local government, or a licensed placement agency for caring for a foster child in your home are excluded from your gross income under Internal Revenue Code Section 131, because the IRS treats them as reimbursement for the cost of care rather than as wages or business profit.¹ The exclusion has edges, though, and foster parents who understand where it stops can still claim credits and deductions that often go unused.

Which Payments Are Tax-Free

The exclusion covers what the statute calls a “qualified foster care payment.” That means money paid by a state or local government foster care program, or by a qualified private placement agency, for the care of a foster individual the agency placed in your home.¹ The amount does not matter. If the payment meets the definition, it stays out of your taxable income.

Two related categories fall under the same rule:

Difficulty of care payments. Extra funds paid when the foster child has a physical, mental, or emotional condition requiring more intensive care. The state must have determined the child needs the additional care, and the paying agency must designate the payment as compensation for it. Up to 10 individuals under age 19 and up to 5 individuals age 19 or older can be covered tax-free; amounts paid for anyone beyond those counts are taxable.¹
Medicaid waiver payments. If you provide home-based care to a family member or another person under a state Medicaid waiver program, IRS Notice 2014-7 treats those payments as difficulty of care payments excludable under Section 131, so long as the care recipient lives in your home. The same 10-and-5 caps apply. Care provided outside your home does not qualify.²

When Foster Care Payments Are Taxable

The exclusion is generous, but a few situations push payments back into taxable income.

Too many adults in your care. For standard foster care payments (not difficulty of care), the exclusion runs out once you are caring for more than five qualified foster individuals age 19 or older. Payments attributable to people beyond that fifth adult must be included in income.³

Bed retention payments. When an agency pays you to hold a bed open with no foster individual actually living in your home, the payment likely does not qualify. The statute requires that the payment be for caring for a qualified foster individual in the provider’s home, and an empty bed does not meet that requirement.¹

Running your home as a business. If your foster care operates as a trade or business, the taxable portion of your payments goes on Schedule C. The IRS separates families providing care from people operating a caregiving business.⁴

Self-Employment Tax

Self-employment tax follows the same trade-or-business question. A family caring for foster children placed by an agency, with no other caregiving clients, generally does not owe self-employment tax on those payments. If you also run a day care or adult care business, the IRS treats the foster payments as part of that business, and the 15.3% self-employment tax applies on top of any income tax.⁵

If You Get a 1099 for Excludable Payments

Difficulty of care payments to foster care providers generally should not be reported on a 1099, but agencies sometimes issue a 1099-MISC or 1099-NEC by mistake. If the payments qualify for exclusion, they stay excluded. On your return, report the amount shown on the 1099 and then back it out so your taxable income reflects the exclusion. A preparer familiar with foster care rules can keep the paperwork clean and avoid a needless notice from the IRS.

Claiming a Foster Child as a Dependent

You can claim a foster child as a dependent, but the child has to meet the same tests as any qualifying child: living with you for more than half the year, being under age 19 (or under 24 if a full-time student), and not providing more than half of their own support.⁶

The support test is where foster parents most often lose the deduction. Payments from a placement agency or the state count as support provided by the agency, not by you. If the agency pays $4,000 toward the child’s care during the year and you spend $3,000 of your own money, the agency provided more than half the support, and you cannot claim the child under this test. Unreimbursed out-of-pocket expenses you do not deduct as charitable contributions do count as support you provided.⁷ Add up what everyone spent on the child from all sources, and confirm your share is more than half.

Credits Foster Parents Can Still Claim

Child Tax Credit

If your foster child qualifies as a dependent, you may be eligible for the Child Tax Credit, worth up to $2,200 per qualifying child for 2026. The child must be under 17 at year-end, hold a Social Security number valid for employment, and be a U.S. citizen or resident. Filers with low tax liability may also qualify for the refundable Additional Child Tax Credit, worth up to $1,700.⁸

Earned Income Tax Credit

The EITC can be worth up to $8,231 in 2026 for a family with three or more qualifying children, and a foster child who meets the dependency rules counts as a qualifying child. The obstacle for many foster parents is that the EITC requires earned income, and Section 131 payments are not earned income. There is a workaround: if you receive difficulty of care payments or qualified Medicaid waiver payments, you can elect to treat those as earned income for the EITC and the Additional Child Tax Credit.² The election is all-or-nothing. For foster parents with little other wage income, it can unlock thousands of dollars in refundable credits.

Adoption Tax Credit

Foster parents who adopt through the system can claim the Adoption Tax Credit. For 2025, the credit covers up to $17,280 in qualified adoption expenses per child, with a portion refundable up to $5,000.⁹ The 2026 figure had not been published at the time of writing but is adjusted annually. Qualified expenses include adoption fees, attorney fees, court costs, and adoption-related travel. Amounts reimbursed by a government program or your employer do not count.

For a child classified as having special needs, you can claim the full credit even if your out-of-pocket adoption expenses were small or zero.⁹ Because many foster adoptions involve children who meet that designation, adoptive foster parents often receive a substantial credit regardless of what they actually paid.

IRA Contributions From Difficulty of Care Payments

Because excluded foster care payments are not earned income, a foster parent with no outside job would ordinarily be shut out of an IRA. The SECURE Act of 2019 fixed this for difficulty of care payments specifically. Those tax-exempt payments count as compensation for purposes of IRA and qualified retirement plan contribution limits, so a foster parent whose only income comes from difficulty of care payments can still contribute to a traditional or Roth IRA up to the normal annual limit.

Deducting Unreimbursed Foster Care Expenses

Foster parents often spend more on a child than the agency reimburses. Those extra costs may be deductible as a charitable contribution if two conditions are met: you have no profit motive in providing the care, and a qualified organization selected the child placed in your home.¹⁰ Eligible costs include out-of-pocket spending on food, clothing, and other care for the foster child.

Motive is the pivot. If you are caring for the child primarily because you want to adopt, the IRS treats the expenses as personal rather than charitable, and they are not deductible on that basis.¹⁰ They can still count as support you provided when you run the dependency support test. Keep receipts and detailed records for clothing, school supplies, medical copays, and similar spending. Documentation protects the deduction and supports the dependency calculation.

1
Office of the Law Revision Counsel. 26 USC 131 – Certain Foster Care Payments
2
Internal Revenue Service. Certain Medicaid Waiver Payments May Be Excludable From Income
3
Office of the Law Revision Counsel. 26 USC 131 – Certain Foster Care Payments
4
Internal Revenue Service. Publication 525, Taxable and Nontaxable Income
5
Internal Revenue Service. Family Caregivers and Self-Employment Tax
6
Internal Revenue Service. Dependents
7
Internal Revenue Service. Publication 501, Dependents, Standard Deduction, and Filing Information
8
Internal Revenue Service. Child Tax Credit
9
Internal Revenue Service. Adoption Credit
10
Internal Revenue Service. Publication 526, Charitable Contributions