TAS Tax Tip: Some Medicaid Waiver Payments May Be Excludable From Income

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When and how to claim certain Medicaid waiver payments you received as an individual care provider can be confusing. Even if the Medicaid waiver payments you received are not taxed, you may qualify to use the amount of those payments to calculate the Earned Income Credit (EIC), and the Additional Child Tax Credit (ACTC).

See Publication 596, Earned Income Credit (EIC), for more information or use the IRS’ interactive EITC Assistant, which is also in Spanish (Asistente EITC). See the 2019 Instructions for Schedule 8812 for more information about the ACTC.

What Is a Medicaid Waiver Payment?

A Medicaid waiver payment (MWP) is money paid to an individual who performs certain services such as housecleaning, meal preparation, laundry, grocery shopping, and personal care services for a person that lives with them in their home. The services must be authorized through a Medicaid Home and Community-Based Services Waiver (Medicaid waiver) program and that program must be administered by either a state or a certified Medicaid provider.

These payments could also be called In-Home Healthcare Services (IHHS) payments, In-Home Support Services (IHSS) payments or difficulty of care payments.

Why Are These Payments Excludable From Income?

Notice 2014-7, which was issued by the IRS, explains that, as of January 3, 2014, the IRS will treat a qualified MWP as a difficulty of care payment. This means the payment is not taxed, regardless of the individual care provider’s relationship to the person receiving the care, as long as:

the individual care provider lives with the person receiving care AND
the number of qualified people being cared for is not more than 10, if the qualified people are age 18 and under OR
the number of qualified people being cared for is not more than 5, if the qualified people are age 19 or over.

IRS.gov has additional information about Notice 2014-7 along with answers to frequently asked questions (FAQs) at Certain Medicaid Waiver Payments May Be Excludable From Income.

How to Report Medicaid Waiver Payments

On line 1 of your tax return, report any MWP you received that you choose to include in earned income for purposes of claiming the EITC or ACTC, even if you didn’t receive a Form W-2 reporting these payments.
On Schedule 1, line 8 of your tax return, subtract the nontaxable amount of the MWP from any other income that you must report on line 8 and enter the result. If the result is less than zero, enter it in parentheses.

NOTE: For an electronically filed return, enter “Notice 2014-7” as an explanation for the MWP amount reported on Schedule 1, line 8. If you file a paper return, write “Notice 2014-7” on the dotted line for Schedule 1, line 8.

What Should You Do if You Reported the Payments In a Prior Year Incorrectly?

If you reported MWP in your total income and paid income tax on them, you should consider filing an amended return using Form 1040-X, Amended U.S. Individual Income Tax Return, and cite Notice 2014-7.

Also, if you didn’t ask the IRS to consider your MWP as earned income to calculate either EITC or ACTC in a prior year, consider filing an amended return so you can receive, or possibly receive more EITC or ACTC, if you otherwise qualify for these credits.

To help expedite the processing of your amended return, include the following items:

The full name of the individual who received care (and their social security number (SSN) or other taxpayer identifying number, if available)
Copies of documents to show that you and the individual who received care resided in the same home for the year you are amending. Examples of documents could be a driver’s license or other government-issued document, correspondence from either a Federal or state social agency that you might be receiving benefits from, a bank statement, a medical bill, or a utility bill, for both you and the individual who received care, showing you both had the same address.
Documentation that the individual received care under a state MWP, such as a letter from the appropriate state agency.

See our Get Help page for more information about Amending a Tax Return.

When Do I Need to File By to Still Get a Refund?

In most cases, an original return claiming a refund must be filed within three years of its due date for the IRS to issue a refund. This is also called the refund statute expiration date (RSED). Also, be sure to file your amended return before the RSED expires.

Generally, after the three-year window closes, the IRS can neither send a refund for the specific tax year, nor apply any credits, including overpayments of EITC or ACTC to other tax years that are underpaid.

Special note: The RSED for Tax Year 2016 is extended from April 15, 2020 to July 15, 2020 under the current law due to the Coronavirus as explained on the Coronavirus Tax Relief page on IRS.gov: Filing and Payment Deadlines Questions and Answers.

This date may subsequently be changed, but you should try to file any 2016 tax returns or amended tax returns as soon as possible, so you do not miss out on a refund.

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Source: taxpayeradvocate.irs.gov