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

June 1, 2020

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Information is available on how to take account of Medicaid waiver payments when determining the Earned Income Tax Credit (EITC) 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 are Medicaid Waiver Payments?

The Medicaid waiver payments (MWP) described in Notice 2014-7 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, which was issued by the IRS, explains that, as of January 3, 2014, 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.

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

  1. On line 1 of your tax return, report any MWP you received as wages that you choose to include in earned income for purposes of claiming the EITC or the ACTC, even if you didn’t receive a Form W-2 reporting these payments.
  2. On Schedule 1, line 8 of your tax return, subtract the nontaxable amount of the MWP received as wages 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 certain MWP described in Notice 2014-7 in your total income and paid income tax on them, you should consider filing an amended return to exclude them from gross income using Form 1040-X, Amended U.S. Individual Income Tax Return, and citing Notice 2014-7. See the Instructions for Form 1040-X for information on when to file a Form 1040-X.

Also, if you didn’t include MWP described in Notice 2014-7 in 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, 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 the EITC or the 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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