11.22 Foster Care Payments

You may generally exclude from gross income payments received from a state or local government or a certified placement agency for providing foster care services in your home. However, there are limitations. Payments received for caring for one’s own disabled child are taxable. The IRS takes the position that even if the payments are labeled as foster care payments, they do not qualify for the exclusion because care by a biological parent is not foster care under the ordinary meaning of the term. In addition, payments are taxable to the extent they are received for the care of more than five individuals age 19 or older.

In one case, taxpayers who owned two homes were denied the exclusion for payments they received under a state program on the grounds that the home where they provided the foster care services to disabled adults was not “their home.” The Tax Court held that a taxpayer’s home for purposes of the exclusion is where the taxpayer resides and experiences the routines of private life such as sharing meals, time and holidays with family. The taxpayers worked in the home where they provided the services but they did not “live” there and so the exclusion was not allowed.

Exclusion for difficulty-of-care payments.

The exclusion also generally applies to difficulty-of-care payments, which are designated by a state as extra compensation for providing additional care required by handicapped foster individuals in your home. However, difficulty-of-care payments must be reported as income to the extent they are for more than 10 qualified foster individuals under age 19, or more than 5 qualified foster individuals age 19 or older.