Qualifying payments for foster care are generally not taxable, according to IRS Publication 525. To be excluded from income, foster care payments have to have been received from a state or local government or a qualified placement organization for care provided in the taxpayer's home.
Foster care payments become taxable if there are more than five individuals aged 19 or older in the home.
Certain difficulty-of-care payments for foster individuals who are physically, mentally or emotionally handicapped may also be excluded from income. The state has to determine if the additional compensation is needed. These payments become taxable if the taxpayer is caring for more than 5 individuals aged 19 or older or more than 10 foster children.