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Foster Care and Biological Parents Subsidies

(Submitted to by Mason City Attorney David A. Grooters)

Many adoptive parents first provide foster care to children in their home. Foster parents typically receive a monthly subsidy from the State of Iowa (Department of Human Services) to assist the family with the expenses of providing such foster care to children. As we approach tax season, this article discusses whether those foster care subsidies are considered taxable income, and also distinguishes the situation where biological parents provide care to their own special needs children. The article concludes that subsidies to foster parents are NOT taxable, wherein subsidies to biological families are taxable in most instances.


State and local governments provide programs and services to enable disabled children and adults to avoid institutionalization and to remain at home and in the community. Questions have arisen whether certain payments to biological parents for the care of their own children may be excludable from gross income as “difficulty of care payments” under section 131 of the Internal Revenue Code.

Section 131

Section 131 provides that a foster care provider may exclude “qualified foster care payments” from gross income. A qualified foster care payment must be made pursuant to the foster care program of a state or political subdivision of a state. The payer must be a state, a political subdivision of a state, or a “qualified foster care placement agency.” A qualified foster care placement agency is a placement agency that is licensed or certified – by a state, a political subdivision of a state, or an entity designated by a state or a political subdivision of a state for the foster care program of the state or the political subdivision of the state. In addition to payments for basic foster care, qualified foster care payments may include “difficulty of care payments.” Difficulty of care payments are compensation for providing the additional care of a qualified foster individual that is required by reason of a physical, mental, or emotional handicap of the individual, if the care is provided in the foster care provider’s home and the state has determined a need for the additional compensation.

Section 131 does not define the term “foster care” or “foster care provider.” However, the ordinary meaning of foster care excludes care by a biological parent. To “foster” means to give parental care to a child who is not one’s natural or legally adopted child. In addition, section 152(f)(1)(A)(i) and (ii) of the Code distinguish between a son or daughter and a foster child. Section 152(f)(1)(A)(i)
defines the term “child” to mean an individual who is a son, daughter, stepson, or stepdaughter of the taxpayer or parent; whereas, section 152(f)(1)(A)(ii) defines the term “child” to include an eligible foster child of the taxpayer which means an individual who is placed in the home of the taxpayer by an authorized placement agency, judgment or court order. IRS Chief Counsel published a Program Manager Technical Assistance (PMTA 2010-007) on March 29, 2010, concluding that that a biological parent may not qualify as a foster care provider under section 131.


County X makes payments to Parent Y, the biological mother of a disabled biological minor son, for providing 4 hours a day of nonmedical services. The payments provided to Parent Y cannot qualify as “difficulty of care payments” under section 131 of the Internal Revenue Code and are not excludable from gross income. Rather, these payments are compensation for services that are includable in the biological parent’s gross income.

(Note: this article was based heavily on materials authored by BY WANDA VALENTINE, FSLG SENIOR ANALYST for the Internal Revenue Service and appropriate attribution is hereby given)

David A. Grooters is a Mason City attorney practicing in areas including adoption law with the law firm of Pappajohn, Shriver, Eide & Nielsen P.C. He can be reached at his office at 103 East State Street, Suite 800, Mason City, Iowa, via phone at (641) 423-4264, (641) 423-3145 (fax), or
The firm’s website is:||

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