Many caregivers are surprised to learn that certain payments received under a state Medicaid Home and Community-Based Services waiver program may be excluded from federal taxable income. IRS Notice 2014-7 treats qualifying payments as “difficulty of care” payments when the caregiver provides care to an eligible individual in the caregiver’s home. However, not every caregiver payment qualifies, and the way the payment is reported can depend on the caregiver’s individual circumstances and tax documents.
What Is IRS Notice 2014-7?
IRS Notice 2014-7 provides that certain payments made to individual caregivers under a state Medicaid Home and Community-Based Services waiver program may be excluded from federal gross income as difficulty-of-care payments. The rule can apply whether the caregiver is related or unrelated to the person receiving care, as long as the requirements are met, including that the eligible individual lives in the caregiver’s home.
Who May Qualify for the Notice 2014-7 Exclusion?
A caregiver may qualify when the payments are made under a qualifying Medicaid Home and Community-Based Services waiver program and are for care provided to an eligible individual who lives in the caregiver’s home. The caregiver may be related or unrelated to the person receiving care. The shared-home requirement is especially important. For example, simply working several days a week in the care recipient’s separate home generally does not satisfy the rule.
Can Excluded Medicaid Waiver Payments Still Count as Earned Income?
Yes. Even when qualifying Medicaid waiver payments are excluded from taxable income under IRS Notice 2014-7, a taxpayer may choose to include those payments as earned income when calculating the Earned Income Credit (EIC) and Additional Child tax Credit (ACTC), provided the payments otherwise qualify as earned income. The taxpayer must generally choose all or none of the qualified Medicaid waiver payments for the year rather than selecting only part of the payments. Depending on the taxpayer’s circumstances, making this election can increase or decrease the credit, so the return should be calculated both ways before making the choice.
How Are Medicaid Waiver Payments Reported on a Tax Return?
How Medicaid waiver payments are reported depends on the tax document received and the caregiver’s circumstances. Some caregivers receive a Form W-2, while others may receive Form 1099-NEC or Form 1099-MISC. Qualifying payments may still be excluded from federal taxable income under Notice 2014-7, but the reporting method can differ. Caregivers who operate a separate home-care business may also have different reporting requirements. Each situation should be reviewed carefully before preparing the tax return.
What Documents Should a Caregiver Keep?
Caregivers should keep records showing that the caregiver and care recipient lived in the same home, along with documentation showing that the payments were made under a qualifying state Medicaid waiver program. Helpful records may include state agency letters, Forms W-2 or 1099, government-issued documents showing the same address, bank statements, medical bills, or utility bills. Good documentation is especially important if a prior-year return is amended to apply Notice 2014-7.
Can a Prior-Year Tax Return Be Amended?
Possibly. If qualifying Medicaid waiver payments were previously reported as taxable income, an amended return may be filed for a year that is still open under the statute of limitations. In general, a refund claim must be filed within three years from the date the original return was filed or two years from the date the tax was paid, whichever is later. An amended return may also be worth reviewing if qualified Medicaid waiver payments were not previously included as earned income when calculating the EIC or ACTC and doing so would have been beneficial.
Need Help with Medicaid Waiver Payments?
IRS Notice 2014-7 can provide valuable tax treatment for qualifying caregivers, but the rules depend on the caregiver’s living arrangement, the Medicaid waiver program, the ta documents received, and the individual tax situation.
Precision Accounting and Tax Solutions can help caregivers review their payments, determine whether the Notice 2014-7 exclusion may apply, and evaluate the available earned-income election for applicable tax credits.
Serving Clearwater and Tampa Bay are. English and Spanish assistance available.
Contact us today to schedule a consultation.
