It depends on the nature of the state program and intent of the grants.
If payments are made to the parents of a child with disabilities for the health services they provide, they are likely to be taxable income for the parent like any other employment income. If the state program is reimbursed for medical expenses paid by the parents, they are probably not taxable. The state agency awarding the funds should be able to answer the question with more certainty.
General IRS Rules Regarding Grants
Grant funds for individuals are generally considered income, but the IRS lists exceptions for approved programs and services. One exception is the Medicaid Home and Community Services waiver payments for in-home health care services.
Parents of children with special needs have many income tax deductions, exemptions or credits available to them. Some tax benefits and favorable treatment options are unfamiliar even to tax preparers. You can reach out to a special needs planning attorney in your area to find out more.
Harry S. Margolis practices elder law, estate, and special needs planning in Boston and Wellesley, Massachusetts. He is the founder of ElderLawAnswers.com and answers consumer questions about estate planning issues here and at AskHarry.info.
