Foster Care Payments: When They Are Excluded

Some people who care for foster children or adults in their homes receive payments. Publication 525 (2025), Taxable and Nontaxable Income, explains when those payments are excluded from income. This guide is general information. It is not advice about your return.

The general rule

The publication says payments for caring for a qualified foster individual in your home are generally excluded from income. The payment can come from a state, from a political subdivision of a state, or from a qualified foster care placement agency.

Who is a qualified foster individual

The publication says a qualified foster individual is a person who meets both of these tests:

• The person lives in a foster family home.
• The person was placed there by a state agency, a state political subdivision agency, or a qualified foster care placement agency.

Both tests must be met. If the placement did not come through one of those agencies, the exclusion may not apply. Keep the placement papers for each person in your home. The rules cover both children and adults, as the age limits below show.

Difficulty-of-care payments

Some payments are labeled by the payer as pay for extra care. The extra care is for a person who is physically, mentally, or emotionally handicapped. The publication says a state must decide that the extra pay is needed. The care must be given in the foster care provider's home, where the person was placed.

These payments are taxable to the extent they are received for more than ten qualified foster individuals under age 19. They are also taxable to the extent they are received for more than five qualified foster individuals age 19 or older.

The publication also says certain Medicaid waiver payments can be treated as difficulty-of-care payments. That applies when an individual care provider cares for an eligible person living in the provider's home. IRS Notice 2014-7 explains that rule.

Payments to hold space

If you are paid to keep space in your home for emergency foster care, the publication says you must include that payment in your income. The publication lists this rule separately. The space payment is taxable even though the foster care payment itself may be excluded.

Reporting taxable payments

Keep records. They should show the placing agency, the dates, the number of people in your home by age group, and each payment. If you are in the foster care business, the publication says to report the payments you must include on Schedule C (Form 1040). The publication refers to Publication 587 for figuring the deduction for business use of your home. Our guide to the home office deduction for the self-employed covers those rules.

Common mistakes

• Assuming every foster payment is excluded. The rules depend on who placed the person and the type of payment.
• Skipping the placement check. Both tests must be met.
• Forgetting to count the people in your home by age group, since the difficulty-of-care limits differ.
• Treating a space payment as an excluded foster payment.

Simple steps

1. Confirm who placed each foster individual in your home, and whether an agency made the placement.
2. Find out whether any payment is labeled as difficulty-of-care pay.
3. Count the foster individuals in your home by age group, under 19 and 19 or older.
4. Report any taxable payment, such as payment to hold space, as income.
5. If you are in the foster care business, report taxable payments on Schedule C.

Other payments for services may follow different rules. For self-employment income, see our guide to Schedule C business income and expenses.

Upload your documents and answer a few simple questions to start your return.

Sources: Sources: IRS, Publication 525 (2025), Taxable and Nontaxable Income (https://www.irs.gov/pub/irs-pdf/p525.pdf); IRS Notice 2014-7 This is general information, not advice about your specific return.

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