@Anonymous
I don’t want you to be misled by the document that Amy posted. It mainly relates to how the support test is applied toward counting the foster children as dependents. There are different support tests for different kinds of dependents and the document that Amy quoted discusses how to determine what counts as “support“.
If you operate a foster care home with a large number of children receiving multiple state payments, you may be considered a business. You must report the foster payments as business income and you can deduct your business expenses, like any other business. This would all go on schedule C.
If you take in one or two foster children for whatever reason as long as it is not a business, then any support payments provided by the state are not taxable income and your expenses in caring for the foster children are not deductible, any more than you would be able to deduct the cost for food or clothing for your own biological children.
I would be very dubious and very cautious about treating your out-of-pocket expenses as a charitable donation. The IRS is very clear that you can’t take a charitable deduction for expenses that primarily benefit yourself or your family. So if the reason that you are taking in a foster child is because they are a relative whose parent is unable to care for them, or because you are interested in adopting, then you are benefiting yourself or your family and your excess expenses would not be deductible, even if the placement was managed by a qualified charity. The IRS says you may deduct your excess costs as a contribution to a qualified charity, if the children were placed in your home by a qualified charity and if the reason for accepying the children was primarily to benefit the qualified charity. You would need some kind of a statement or letter or receipt from the charity attesting to this to prove in case of audit that you accepted the foster children to benefit the charity. And remember, this would be an itemized deduction on schedule A, so you may not benefit from listing the expenses unless your itemized deductions are already more than your standard deduction.
This is what IRS publication 526 has to say about foster parents.
Foster parents.
You may be able to deduct as a charitable contribution some of the costs of being a foster parent (foster care provider) if you have no profit motive in providing the foster care and aren't, in fact, making a profit. A qualified organization must select the individuals you take into your home for foster care.
You can deduct expenses that meet both of the following requirements.
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They are unreimbursed out-of-pocket expenses to feed, clothe, and care for the foster child.
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They are incurred primarily to benefit the qualified organization.
Unreimbursed expenses that you can't deduct as charitable contributions may be considered support provided by you in determining whether you can claim the foster child as a dependent. For details, see Pub. 501, Dependents, Standard Deduction, and Filing Information.
Example.
You cared for a foster child because you wanted to adopt her, not to benefit the agency that placed her in your home. Your unreimbursed expenses aren't deductible as charitable contributions.
