Is Foster Care Income Taxable? What Illinois Foster Parents Need to Know
- Foster Parent Education
- October 7, 2026
Most people who search this question are not curious about tax law. They are doing math on their own household. A payment is arriving each month to help care for a child, and somewhere in the back of their mind sits a worry that it will show up next April as income they owe on, in a year that is already stretched thin.
Here is the direct answer. Under federal law, the board payments an Illinois caregiver receives from the state or from a licensed placement agency are generally not taxable income. Internal Revenue Code Section 131 excludes qualified foster care payments from a provider’s gross income, so long as the payment comes from a state, a political subdivision, or a qualified placement agency, and is paid for caring for a placed child in the provider’s own home [1]. That is the rule most families will live under, and it is why this money does not usually change what you owe.
There are edges to it, and they are worth knowing before you file rather than after. At Let It Be Us, we walk Illinois families through the practical side of caring for a placed child, and the tax question comes up early and often. To register for a live webinar with Let It Be Us and learn about adoption parenting opportunities, please visit www.letitbeus.org/events. What follows is the mechanism behind the rule, the situations where payments do become taxable, and what all of it means when you sit down with your return. None of it is a substitute for advice from your own tax professional.
Why the Exclusion Exists in the First Place
The exclusion is not an oversight or a courtesy. It reflects what a board payment is for. The money is meant to help cover a child’s basic living expenses while that child lives with you, and Congress wrote Section 131 so that the tax code would treat it that way rather than as compensation for work performed.
That framing matters, because it explains the conditions attached. For a payment to be excluded, three things have to be true [1]:
- Who pays it. The payment comes from a state, a political subdivision of a state, or a qualified foster care placement agency. Money from a private arrangement outside that structure is a different question.
- Who is cared for. The payment is for a qualified foster individual, meaning a person placed with you by a state agency or a qualified placement agency.
- Where the care happens. The care is provided in your own home, not in a facility you operate elsewhere.
For a licensed Illinois caregiver receiving monthly board payments through DCFS or through a licensed agency, all three conditions are typically met without any effort on your part. The structure of the placement satisfies them. If you are still working out how that placement structure comes together, our guide to becoming a foster parent in Illinois covers the licensing picture that sits underneath the tax picture.
When Foster Care Payments Do Become Taxable
The exclusion is broad, but it is not unlimited. The statute and IRS Publication 525 both describe specific points where payments stop being excludable, and each one is tied to scale or to what the payment is actually buying.
- More than five foster individuals age 19 or older. Payments must be included in income to the extent they are received for the care of more than five qualified foster individuals who are 19 or older.
- Difficulty-of-care payments past the person thresholds. Difficulty-of-care payments are not excludable to the extent they are made for more than 10 qualified foster individuals under age 19, or more than five qualified foster individuals age 19 or older.
- Payments to hold space open. If you are paid to maintain space in your home for emergency foster care, that payment is taxable and must be included in income, whether or not a child is ever placed in it [2].
That third one surprises people, so it is worth sitting with. The logic is consistent with everything above. A payment for a child’s living expenses while that child lives with you is excluded. A payment for standing by, for keeping a bed available, is not tied to a child’s care at all. It is closer to a retainer, and the tax code treats it accordingly.
The person-count thresholds, on the other hand, are unlikely to affect a typical Illinois household. They exist to draw a line between a family caring for children and an operation caring for many adults at once. If you are nowhere near those numbers, they are not your concern.
Difficulty-of-Care Payments and the Medicaid Waiver Rule
A difficulty-of-care payment is additional compensation for caring for a child with physical, mental, or emotional care needs, determined by the state and paid for care provided in your home. Section 131 covers these the same way it covers ordinary board payments, subject to the person limits described above.
This is where a piece of guidance shows up that almost no article on this topic mentions, and it matters for a specific group of caregivers. In Notice 2014-7, the IRS extended the same Section 131 difficulty-of-care treatment to certain Medicaid Home and Community-Based Services waiver payments received by providers caring for an individual in the provider’s home [3]. If you receive Medicaid waiver payments for in-home care, those payments may be excludable from your gross income under the same mechanism that covers foster board payments.
The Notice also settled a reporting question that causes real confusion. A payer who has independent knowledge that the payments are excludable under Notice 2014-7 should not file a Form 1099-NEC reporting them to the care provider. Put plainly, if the payments are excludable and the payer knows it, no 1099-NEC should be arriving in your mailbox for them. When one does, it is usually a reporting error rather than a signal that the money is taxable after all.
What This Means When You File
For most Illinois foster parents, the answer to "what do I do with this on my return" is close to nothing. Excludable board payments are not part of gross income, so they generally do not get reported as income at all. There is no special form to attach and no line to fill in.
Two situations change that. The first is scale. If your payments exceed the person thresholds, or if you are being paid to maintain emergency space, the taxable portion is treated as business income and reported on Schedule C [2]. That is the practical consequence of the carve-outs described above.
The second is paperwork that does not match reality. Suppose an Illinois foster parent receives ordinary board payments for two children placed in her home, and a 1099 arrives anyway for payments that qualify for the exclusion. The form’s existence does not make the money taxable. The IRS guidance on Medicaid waiver payments addresses this directly for that category, describing how a taxpayer can report the amount shown and then back out the portion that is not taxable [3]. The same instinct applies generally: an erroneous information return is a reporting problem to resolve, not a tax you suddenly owe. Bring the form and the placement documentation to whoever prepares your return, and let them handle the mechanics.
One more piece of context, since it comes up alongside the tax question. Being excluded from federal gross income does not automatically mean a payment is invisible to every other calculation. Michigan, for example, requires nontaxable board payments to be counted toward total household resources for its state property tax credit [4]. That is a Michigan rule and not an Illinois one, but it illustrates a useful principle: "not taxable income" and "never relevant to any benefit formula" are two different statements. If you are applying for something that asks about household resources, ask specifically how foster payments are treated.
If your questions are drifting from taxes toward training and licensing requirements, our comprehensive guide to foster parent training covers what Illinois asks of prospective foster parents before a placement is ever made.
Can Foster Parents Still Claim the Child Tax Credit?
Yes, and this is a separate question from everything above. Whether your board payments are taxable has no bearing on whether a child placed with you can be claimed as a qualifying child.
The rules turn on the relationship and the living arrangement. A foster child placed with you by an authorized placement agency, or by the judgment or decree of a court, can be your qualifying child, provided the child lived with you for more than half the year and the other qualifying-child tests are met [5]. Legal aid guidance aimed at foster and kinship families describes the same framework in plain terms [6].
Where families go wrong is in conflating the two questions. They reason that because the money is not income, the child must not count for credit purposes either. The two rules operate independently. Excludable payments do not disqualify you from claiming a foster child, and claiming a foster child does not make the payments taxable. Ask about them separately.
If you are also considering adoption through foster care, we support that pathway too, and the qualifying-child rules touch both. The specifics depend on timing and legal status, which is another reason to raise this with a tax professional rather than reasoning it out from a blog post.
State Taxes and the Questions Only DCFS Can Answer
Everything above describes federal treatment. Section 131 is a federal exclusion, and it is the baseline that applies regardless of where you live.
State-level treatment is a separate inquiry, and it is one this article deliberately does not answer for Illinois. Program administration and state tax conformity can shift, and a confident answer here that turns out to be stale would serve you badly at exactly the wrong moment. For how Illinois treats these payments on a state return, and for any question about the structure or timing of the payments themselves, the authoritative sources are DCFS, your licensing agency, and a tax professional who can look at your actual return. Peer organizations in other states describe the same federal baseline while pointing families to check their own state’s rules and consult a tax professional for the rest [7].
That is not a dodge. It is the same advice we give families about board payment amounts, which are set by DCFS and are best confirmed directly with DCFS or your agency rather than read off a page that may be a year out of date. If your underlying question is really about eligibility and process rather than tax mechanics, our foster care requirements guide is the better starting point.
Frequently Asked Questions
Do I have to report foster care payments on my taxes?
Generally, no. Qualifying board payments are excluded from gross income under Section 131, which means they are not reported as income on your federal return. The exceptions are payments beyond the person-count thresholds and payments for maintaining emergency space, which are taxable and reported on Schedule C.
What if I get a 1099 for my foster care payments?
A 1099 does not by itself make excludable payments taxable. For Medicaid waiver payments, the IRS has said that a payer who knows the payments are excludable should not issue a Form 1099-NEC for them, and it describes how a taxpayer can report an erroneously issued amount and back out the nontaxable portion. Take the form to your tax preparer along with your placement documentation.
Can I still claim my foster child for the Child Tax Credit?
Often, yes. A child placed with you by an authorized placement agency or by court order can be a qualifying child if the child lived with you for more than half the year and the remaining tests are met. This is decided independently of how the payments themselves are taxed.
Is emergency foster care standby pay taxable?
Yes. If you are paid to keep space available in your home for emergency placements, that payment must be included in your income even if no child is placed. It is not tied to the care of a specific child, so the Section 131 exclusion does not reach it.
Are difficulty-of-care payments treated differently from regular board payments?
Not in the general case. Difficulty-of-care payments are excludable under the same provision, with their own person-count limits: they stop being excludable to the extent they are made for more than 10 individuals under 19 or more than five individuals 19 or older.
Ready to Foster in Illinois?
The tax question is usually one of the last practical worries standing between a family and a decision, which is why it is worth answering plainly rather than leaving it to speculation. For most Illinois foster parents, the money that arrives to help care for a child is not going to change what they owe. The complications live at the edges, and the edges are narrow.
Let It Be Us is ready to support you through the rest of it, from the first questions about licensing to the day a child arrives. Become a licensed foster parent through Let It Be Us by completing this form, or visit www.letitbeus.org/events to attend a live webinar and ask your questions directly. Your foster care journey can start today.
References
[1] Office of the Law Revision Counsel, U.S. House of Representatives. "26 USC 131: Certain foster care payments." United States Code, Title 26 (Internal Revenue Code), 2026. https://uscode.house.gov/view.xhtml?req=%28title:26%20section:131%20edition:prelim%29
[2] TaxAct. "Foster Care Provider/Foster Parent Income." TaxAct Support, August 4, 2026. https://support.taxact.com/support/16952/foster-care-provider-foster-parent-income
[3] Internal Revenue Service. "Certain Medicaid waiver payments may be excludable from income." IRS.gov, 2014 (Notice 2014-7), Q&A last updated April 29, 2026. https://www.irs.gov/individuals/certain-medicaid-waiver-payments-may-be-excludable-from-income
[4] Michigan Department of Treasury. "Is foster care income taxable?" Michigan.gov. https://www.michigan.gov/taxes/questions/iit/accordion/taxable/is-foster-care-income-taxable-1
[5] Brendan McDermott, Congressional Research Service. "The Child Tax Credit: How It Works and Who Receives It." Congress.gov / Congressional Research Service (Library of Congress), November 13, 2025. https://www.congress.gov/crs-product/R41873
[6] Education for Justice. "Tax Rules for Foster Care, Relatives Raising Kids, and Adoption." LawHelp Minnesota, April 2026 (tax year 2025). https://www.lawhelpmn.org/self-help-library/fact-sheet/tax-rules-foster-care-relatives-raising-kids-and-adoption
[7] Every Child TN. "A Guide to Foster Care and Taxes." Every Child TN, November 21, 2024. https://everychildtn.org/blog/a-guide-to-foster-care-and-taxes/
0 Comments