Tax season brings a specific kind of stress for kinship caregivers. You took in a grandchild, a niece, a nephew, or a family friend’s child; you figured out school enrollment and doctor visits and car seats….and then a stack of agency payment statements shows up, and with it a question nobody prepared you for: does any of this money count as income?
Plenty of caregivers end up paying tax they never owed while others miss credits worth thousands of dollars because they assumed a foster child would not qualify.
This guide is for kinship caregivers and foster parents anywhere in the United States and walks through what counts as income, when payments can be taxable, who can claim a foster child, which tax benefits you may qualify for, and what records to keep on file.
This is general information rather than tax advice, so bring your own situation to a tax advisor before you file!
How the IRS treats kinship care payments
In most cases, the money is not taxed. Payments received from government agencies for kinship care are treated as tax-free reimbursements. Foster care payments are considered reimbursements, not taxable income, and the same logic covers relatives who take in a child through the system.
The rule comes from Section 131 of the tax code. To be excluded, the money must come from a state, a local government, or a qualified placement agency, and it must be for caring for a child living in your home. IRS Publication 525 spells this out.
One clue: non-taxable kinship payments do not typically involve receiving a W-2 or 1099 form. If your county sends one anyway, that is worth a phone call, because some payment systems generate forms automatically.
When foster care payments may be taxable
- Excess payments. Payments that significantly exceed care costs may be considered taxable income.
- Bed holding. Emergency care payments to maintain space for emergency foster care may be taxable, because you are paid for an open bed rather than for a child in your care.
- Extra services. Money for services beyond basic care can be taxable.
- Difficulty-of-care limits. Difficulty-of-care payments are generally excluded from taxable income if they meet federal requirements. The exclusion stops above 10 children under age 19, or five people age 19 and older.
- Informal arrangements. Tax status for informal kinship care payments may differ based on the specific benefit received. A child-only TANF grant is not taxable. Other help may work differently.
How state tax rules differ across the country
State tax rules can vary from federal treatment regarding kinship care payments, so where you live matters. Three patterns cover most of America.
No state income tax. Nine states do not tax personal income at all: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in one, there is no state return to worry about.
States that follow the federal number. Most of the other 41 states start their calculation from your federal adjusted gross income. Since excluded foster care payments never enter that number, they stay off your state return too.
States with their own rules and credits. Some states add caregiver credits, dependent credits, or their own definitions on top of the federal rules. A few treat certain stipends differently than the IRS does.
Because that last group is where surprises happen, check your state department of revenue site or ask a tax advisor who files in your state.
Foster parents and foster carers: who qualifies
Foster parents are licensed caregivers who take a child placed by an agency. Kinship caregivers are relatives or close family friends raising a child, sometimes licensed and sometimes not.
For taxes, the label matters less than the paperwork. What the IRS looks at is whether an authorized agency placed the child with you. Check your placement agreement before you file.
Child tax credit and claiming foster children
Foster parents can claim a foster child as a dependent under certain conditions, and can claim the child tax credit for qualifying children. To qualify, the child generally must be placed with you by an authorized agency or court order, live with you more than half the year, be under age 17 at year end, not provide more than half of their own support, and have a Social Security number.
The child tax credit can be worth up to $2,200 per child for the 2025 and 2026 tax years. It was $2,000 for earlier years. The credit shrinks once income passes $200,000, or $400,000 for married couples filing jointly.
Gather your placement letter and records showing the child’s address and dates of placement before you claim.
Tax benefits for foster parents and foster carers
Foster parents may qualify for various tax breaks and benefits beyond the child tax credit. The IRS page on family tax benefits is a good starting point.
- Earned income tax credit. A foster child placed by an agency can be a qualifying child. Non-taxable foster care payments do not count as earned income, so the credit depends on your wages or self-employment earnings.
- Credit for other dependents. Up to $500 for a dependent who does not meet the age test.
- Adoption credit. If a placement becomes an adoption, this credit is now partly refundable, up to $5,000 per child.
Because the payments are excluded from income, you generally cannot also deduct the costs they covered.
Reporting foster care payments on tax returns
If your payments are excluded under Section 131, you generally do not report them at all. Nothing goes on your Form 1040 for them.
Two situations change that. If an agency reports the payments on a W-2 or 1099, ask for a corrected form and keep a copy of the request. If you run a care home as a business, the taxable portion goes on Schedule C. Keep agency payment statements either way.
How foster care payments affect government benefits
Tax rules and benefit rules are not the same thing. Payments the IRS ignores can still count when a program calculates household income for SNAP, housing assistance, or other means-tested benefits.
Tell your benefits office when a placement begins. Reporting late can create an overpayment you have to give back.
Recordkeeping, audit risk, and a filing checklist
It is recommended to keep records of kinship care payments and receipts for child-related expenses. Keep placement agreements and written agency notices, receipts for clothing and school and medical costs, mileage and time logs, and any letters from the tax or benefits office.
Two common pitfalls: treating reimbursements as income and paying tax you never owed, and mixing personal money with care money in one account, which makes anything hard to prove later. For complex cases, get a second set of eyes.
Before you file, collect every agency payment statement, confirm placement dates, check any W-2 or 1099 for errors, confirm the child’s Social Security number, and ask a tax advisor about your state rules.
Resources to keep handy
- IRS Publication 525, Taxable and Nontaxable Income: irs.gov/publications/p525
- IRS help line for individuals: 800-829-1040
- Free tax preparation through VITA and TCE: find a site or call 800-906-9887
- Low Income Taxpayer Clinics, for free or low cost help with IRS disputes: see IRS services
- Your state tax agency, for state treatment of kinship payments
- Your caseworker or placement agency, for written confirmation of placement dates
Frequently asked questions
Is kinship care taxable income? Generally no. Payments from a government agency or qualified placement agency for caring for a child in your home are excluded from your income.
Do I get a 1099 for foster care payments? Usually not. If one arrives, ask the agency to correct it.
Can I claim the child tax credit for a foster child? Yes, if the child was placed by an authorized agency, lived with you more than half the year, was under 17, and has a Social Security number. It is worth up to $2,200 per child for 2025 and 2026.
Do I report foster care payments on my tax return? If they are excluded, generally no. Keep the agency statements anyway.
Foster Love is here for the gap
Kinship caregivers step up fast, often with no warning and no budget. Foster Love helps fill in what the paperwork does not cover. See how we support kinship families.