"then none is excludable...jump in with experience with foster homes"

That's why I offered some perspective. It's the same type of evaluation as for those individuals who get the W2 and some value on it is difficulty of care (a person they live in with) and some is not (tasks not covered or a different person not under that care plan), from their employer.

"would have a problem deducting these payments"

That's stated oddly. You either need to report the income, or you don't. Deduct from what?

Foster payments are not reportable and the expenses for that person are not a write off, any more than your own personal/family costs are a write off. It's assumed the payment rate meets the cost of basic needs. For instance, it is supposed to cover a basic clothing allowance (but those foster kids keep growing...).

Difficulty of care is always for services through a comprehensive care plan; not clothing and toiletries. That can be your own relative, or not. There still would not be an expense reporting component. There would not be foster payments along with difficulty of care for your own family member, for instance. This is how you would get paid for taking care of your special needs child which prevents you from being able to work outside the home, as an example.

And the person receiving the care, and housed under a foster placement, might also have Medicaid or CHIP coverage, so it's unusual for the foster parent to need to cover medical costs.

There is a number of persons that triggers Group Home, and that makes it a business operation, even if that is in the same home you live in. In some cases, though, that just requires the health dept to do a site inspection, check for smoke detectors and adequate emergency exists, and basic plumbing (health and welfare check). We've had a number of bad group homes in my State.

You can do research, if the taxpayer doesn't give you the info you need. Just contact the County and/or the State, because there likely is a placement agency relationship involved with all of this (except your own child for whom you have custody, of course).

You can research this, too. For instance, it doesn't mention which State, but this mentions if the entity is incorporated or not, and covers both foster payments and difficulty of care in the discussion:

https://www.taxnotes.com/research/federal/irs-private-rulings/letter-rulings-%26-technical-advice/gr...