Is Foster Care Income Taxable? Exclusions, 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, which treats them as reimbursement for the cost of care rather than as wages.¹ The exclusion is broad, but it has edges, and the way it interacts with credits like the EITC can either cost you money or unlock it depending on what you do.

Which Payments Qualify for the Exclusion

Section 131 uses the term “qualified foster care payment.” To meet the definition, the money must come from a state or local government foster care program or from a qualified foster care placement agency, and it must be for the care of a qualified foster individual living in your home. A qualified foster individual is a person placed with you by a government agency or a licensed private placement agency.¹ If the payment fits that description, it stays off your return no matter the dollar amount.

Difficulty of Care Payments

Many foster parents receive extra money, called a difficulty of care payment, when a child has a physical, mental, or emotional condition requiring more intensive care. These payments qualify for the Section 131 exclusion if the state has determined the child needs that additional care and the paying agency specifically designates the money as compensation for it.¹

The exclusion for difficulty of care payments has its own numerical cap: up to 10 foster individuals under age 19 and up to 5 who are 19 or older. Payments beyond those thresholds 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, those payments can also be tax-free. Under IRS Notice 2014-7, the IRS treats qualified Medicaid waiver payments as difficulty of care payments excludable under Section 131, provided the care recipient lives in your home.² The same caps apply, and care provided outside your home does not qualify.

When Foster Care Payments Are Taxable

A few situations push foster care money back into taxable territory:

Standard (non-difficulty-of-care) foster care payments lose their exclusion for any qualified foster individual over the age of 19 beyond the fifth adult in your care. Payments for those additional adults have to be included in your income.³
Bed retention payments, where an agency pays you to hold a bed open with no foster individual actually in the home, likely do not qualify. The statute requires the payment to be for caring for a qualified foster individual in your home, and an empty bed does not meet that test.¹
If you run your foster home as a trade or business, the taxable portion of payments goes on Schedule C. The IRS separates families providing care from people operating a caregiving business. A family caring for children placed by an agency, with no other caregiving clients, generally does not owe self-employment tax. A family that also runs a day care or adult care business usually does, and self-employment tax adds 15.3% on top of any income tax.⁴⁵

If You Receive a 1099 You Shouldn’t Have

Some foster parents receive a Form 1099-MISC or 1099-NEC for payments that should have been excluded under Section 131. Difficulty of care payments generally are not supposed to appear on a 1099 at all, but mistakes happen. If the payments qualify for exclusion, you still exclude them. Report the amount shown on the 1099 and then back it out so your taxable income reflects the exclusion. A tax preparer familiar with foster care can keep this clean and head off an unnecessary notice from the IRS.

Claiming a Foster Child as a Dependent

You can claim a foster child as a dependent, but the IRS applies the same tests it uses for any qualifying child. The child must live with you for more than half the year, be under 19 (or under 24 if a full-time student), and must not provide more than half of their own support.⁶

The support test is where foster parents often trip up. Payments from a placement agency or the state for the child’s support count as support provided by the agency, not by you. So if the agency pays $4,000 toward a 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 the support test. Unreimbursed expenses you pay out of pocket that are not deductible as charitable contributions do count as support you provided.⁷ Add up everything spent on the child from all sources, then confirm your share exceeds half.

Credits That Depend on the Exclusion

Child Tax Credit

If you can claim the foster child as a dependent, the Child Tax Credit is worth up to $2,200 per qualifying child for 2026. The child must be under 17 at the end of the tax year, have a Social Security number valid for employment, and be a U.S. citizen or resident. If your income tax liability is low, the Additional Child Tax Credit is refundable up to $1,700.⁸

Earned Income Tax Credit

The Earned Income Tax Credit can be worth up to $8,231 in 2026 for a family with three or more qualifying children. Foster children who meet the dependency rules count as qualifying children for the EITC. The hitch is that the EITC requires earned income, and standard foster care payments excluded under Section 131 are not earned income. If you receive difficulty of care payments or qualified Medicaid waiver payments, though, you can elect to include those payments as earned income for purposes of the EITC and the Additional Child Tax Credit.² The election is all-or-nothing: include all of those payments or none. For foster parents with little other income, it can unlock thousands of dollars in refundable credits that would otherwise be out of reach.

Retirement Contributions From Difficulty of Care Payments

Because excluded foster care payments are not treated as earned income, a foster parent with no other job normally could not contribute to an IRA. The SECURE Act of 2019 fixed this for difficulty of care payments. Tax-exempt difficulty of care payments count as compensation for purposes of IRA and qualified retirement plan contribution limits, so a foster parent whose only income is difficulty of care payments can still contribute to a traditional or Roth IRA up to the annual limit.

Deducting Unreimbursed Foster Care Expenses

Many foster parents spend more on a child’s care than they receive back. Unreimbursed expenses may be deductible as a charitable contribution, but only 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.⁹ Eligible costs include out-of-pocket spending on food, clothing, and other care for the foster child.

Motive matters. If you are caring for the child primarily because you want to adopt rather than to benefit the placing agency, the IRS treats those expenses as not deductible as charitable contributions.⁹ They may still count as support you provided for the dependency test. Keep receipts for clothing, school supplies, medical copays, and similar costs; good records protect the deduction and help with the support calculation.

Adoption Credit for Foster-to-Adopt Families

Foster parents who adopt a child from foster care can claim the Adoption Tax Credit. For 2025, the credit covers up to $17,280 in qualified adoption expenses per child, and a portion of the credit is refundable up to $5,000.¹⁰ The 2026 limit is adjusted annually for inflation. Qualified expenses include adoption fees, attorney fees, court costs, and travel directly related to the adoption.

For a child classified as having special needs, you can claim the full credit amount even if you paid little or nothing in out-of-pocket adoption expenses.¹⁰ Because many foster care adoptions involve children who meet the special-needs designation, this gives adoptive foster parents a credit worth thousands of dollars regardless of their actual costs. Expenses reimbursed by a government program or your employer do not qualify.

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. Publication 526, Charitable Contributions
10
Internal Revenue Service. Adoption Credit