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Please see for reference the IRS publication 525 - http://www.irs.gov/pub/irs-pdf/p525.pdf
Foster care providers. Payments you receive from a state, political subdivision, or a qualified foster care placement agency for providing care to qualified foster individuals in your home generally are not included in your income. However, you must include in your income payments received for the care of more than 5 individuals age 19 or older and certain difficulty-of-care payments.
A qualified foster individual is a person who:
Is living in a foster family home, and
Was placed there by:
An agency of a state or one of its political subdivisions, or
A qualified foster care placement agency.
Difficulty-of-care payments. These are additional payments that are designated by the payer as compensation for providing the additional care that is required for physically, mentally, or emotionally handicapped qualified foster individuals. A state must determine that the additional compensation is needed, and the care for which the payments are made must be provided in your home.
You must include in your income difficulty-of-care payments received for more than:
10 qualified foster individuals under age 19, or
5 qualified foster individuals age 19 or older.
Maintaining space in home. If you are paid to maintain space in your home for emergency foster care, you must include the payment in your income.
Reporting taxable payments. If you receive payments that you must include in your income, you are in business as a foster-care provider and you are self-employed. Report the payments on Schedule C or Schedule C-EZ (Form 1040). See Publication 587, Business Use of Your Home (Including Use by Daycare Providers), to help you determine the amount you can deduct for the use of your home.