Payments you receive for providing care to foster individuals generally are not included in your income. However, you must include payments received for the care of more than five individuals age 19 or older and certain difficulty-of-care payments. See below for details.
Per IRS Publication 525 Taxable and Nontaxable Income, on page 31:
Foster care providers. Generally, payment you receive from a state, political subdivision, or a qualified foster care placement agency for caring for a qualified foster individual in your home is excluded from your income. However, you must include in your income payment to the extent it's received for the care of more than 5 qualified foster individuals age 19 years or older.
A qualified foster individual is a person who:
Difficulty-of-care payments. These are 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 the foster care provider's home in which the qualified foster individual was placed.
You must include in your income difficulty-of-care payments to the extent they're received for more than:
Maintaining space in home. If you're 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 and you're in business as a foster care provider, report the payments on Schedule C (Form 1040). See Pub. 587 to help you determine the amount you can deduct for the use of your home..
To report Schedule C Profit or Loss From Business income for your foster care business:
Note that any link in the information above is updated each year automatically and will take you to the most recent version of the document at the time it is accessed.