26 U.S.C. § 131 — Certain foster care payments

(a) General rule. A foster care provider doesn't include "qualified foster care payments" in their gross income, so they aren't taxed on that money. (b) What counts as a qualified foster care payment. (1) It's a payment made under a state's or local government's foster care program. It must be paid by (A) a state or political subdivision of a state, or (ii) a "qualified foster care placement agency." And it must be either (i) paid to the foster care provider for caring for a "qualified foster individual" in the provider's own home, or (ii) a "difficulty of care payment." (2) A "qualified foster individual" is someone placed in a foster family home by (A) a state or local government agency, or (B) a qualified foster care placement agency. (3) A "qualified foster care placement agency" is a placement agency licensed or certified by (A) a state or local government, or (B) an entity the state or local government designates, to make foster care payments to providers. (4) Limit for older foster individuals: if a foster home includes a foster individual who has turned 19, regular foster care payments (not difficulty-of-care payments) are tax-free only for up to 5 such individuals; payments covering more than 5 people who are 19 or older don't qualify for the exclusion. (c) Difficulty of care payments. (1) These are payments — other than the basic caregiving payments described in (b)(1)(B)(i) — that (A) compensate for extra care a foster individual needs because of a physical, mental, or emotional disability, where the state has decided extra pay is needed, and where the care happens in the provider's home, and (B) are labeled by the payer as this kind of compensation. (2) Limit: for any one foster home, difficulty-of-care payments are tax-free only for up to (A) 10 foster individuals under age 19, and (B) 5 foster individuals who don't fall in that group (that is, who are 19 or older).