Certain Medicaid Waiver Payments May Be Excludable From Income

 

What are Medicaid Waiver Payments?

MWP are payments under a Medicaid waiver program to an individual care provider who performs certain services, such as meal preparation, laundry, and personal care services, for an eligible person who has the same home as the provider. 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.

Why Are These Payments Excludable From Income?

Notice 2014-7, explains that the IRS will treat certain Medicaid waiver payments as difficulty of care payments excludable from gross income under section 131 of the Internal Revenue Code. This treatment applies, regardless of the individual care provider’s relationship to the person receiving the care, as long as:

1. the individual care provider has the same home as the eligible person receiving care AND to the extent that
2. the number of qualified individuals being cared for is not more than 10, if the qualified individuals are age 18 and under OR
3. the number of qualified individuals being cared for is not more than 5, if the qualified individuals are age 19 or over.
4. The payments must be made through a state Medicaid waiver program.

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

How to Report Medicaid Waiver Payments

While these payments are able to be excluded from taxable income you may choose to include all, but not part, of these payments in earned income for determining the Earned Income Tax Credit (EITC) or the Advanced Child Tax Credit (ACTC), if these payments are otherwise earned income (wages or income from self-employment).

Although these payments may be excluded from taxable income, caregivers may still receive a Form W-2 or Form 1099 reporting the payments. See questions 11 and 14 in Certain Medicaid Waiver Payments May be Excluded From Income, for information on how to report these payments.

What Should I Do if I Reported theses Payments As Taxable and Want to Exclude Them From Taxable Income?

If you reported MWP described in Notice 2014-7 in your total income and paid income tax, you should consider filing an amended return, to exclude MWP from gross income using Form 1040-X, Amended U.S. Individual Income Tax Return, and citing Notice 2014-7.

Also, if you didn’t include MWP described in Notice 2014-7 as earned income to calculate either the EITC or the ACTC in a prior year, consider filing an amended return, if you received the payments as wages or self-employment income and including the payments in earned income would benefit you.

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

1. The full name of the individual who received care (and the individual’s social security number (SSN) or other taxpayer identifying number, if available).
2. 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.
3. 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, you may file a claim for refund within three years from the date you filed your original return or two years from the date you paid the tax, whichever is later, Tax Topic 308, Amended Returns has more information about this.

IRS Resources

• Publication 525, Taxable and Nontaxable Income
• Publication 596, Earned Income Credit (EIC)
• Certain Medicaid Waiver Payments May Be Excludable From Income
• Interactive EITC Assistant (Asistente EITC)
• Notice 2014-7
• Instructions for Schedule 8812
• Instructions Form 1040 and 1040-SR
• Instructions Form 1040-X
• Tax Topic 308, Amended Returns

TAS Resources

• Claiming the Earned Income Tax Credit (EITC)
• Amending a Tax Return