Hi, for 2022 I got the Difficulty of Care Federal Income Tax Exclusion. How do I show this on my taxes? Thanks in advance :)

[haruhiakanemolly]

So far my returns are saying I owe money for my federal income tax. But it's my understanding that with my Difficulty of Care Federal Income Tax Exclusion, it's not taxable? 

What is the difficulty of care federal income tax exclusion?
Payment for services provided to the employer, by those who share the individual's home address, are classified as “difficulty of care” payments instead of regular wages. Unlike wages, difficulty of care payment are excludible from federal gross income; therefore, they are not subject to federal income tax.

So unsure if I still I'll need to pay, or if I just need to show proof of my form.

[DianeW777]

You are correct.  The difficulty of care payments are not taxable.  IRS Notice 2014-7

If you received a W-2: Enter your W-2 as usual like any other W-2.  Next follow these steps to complete the action of removing this income from your return.

1. Scroll down the page to the last section titled: Less common Income and click show more;
2. Select start or update next to the last topic titled Miscellaneous Income, 1099-A, 1099-C;
3. Scroll down to the last option titled Other reportable income and select start or edit;
4. When it asks, "Any other reportable income?" say yes then you will make one entry
5. Enter this description: IRS Notice 2014-7 excludable income and enter the W-2 Box 1 amount as a Negative (-) number

When you return to the Wages & Income page, scroll to see the negative income beside​​​​​​​ Miscellaneous Income, 1099-A, 1099-C; This will remove the income on your return.

If you received a 1099-NEC and you qualify for earned income tax credit (EIC): Enter your difficulty of care payments using the following steps (do not enter the Form 1099-NEC).

1. Open your TurboTax return > Under Wages and Income scroll to Miscellaneous Income
2. Select Other income not already reported on a Form W-2 or Form 1099 > Start or Revisit
3. Select Yes under Did you receive any other wages > Continue
4. Continue to screen Enter Source of Other Earned Income > Select Employee Compensation that was not reported on a W2
5. This walks you through the Form 8919 - enter the required information as you continue
6. Select Should have been reported on a W-2 for the dropdown

Because the IRS ruled that this income does qualify for earned income tax credit (EITC) purposes means the employee portion of social security and Medicare taxes must be paid. 

Follow these steps to remove the income from your tax return.

1. Scroll down the page to the last section titled: Less common Income and click show more;
2. Select start or update next to the last topic titled Miscellaneous Income, 1099-A, 1099-C;
3. Scroll down to the last option titled Other reportable income and select start or edit;
4. When it asks, "Any other reportable income?" say yes then you will make one entry
5. Enter this description: IRS Notice 2014-7 excludable income and enter the W-2 Box 1 amount as a Negative (-) number

When you return to the Wages & Income page, scroll to see the negative income beside​​​​​​​ Miscellaneous Income, 1099-A, 1099-C; This will remove the income on your return.

[haruhiakanemolly]

Thank you thank you! You just save me from paying over $300 back in taxes. I really appreciate the reply and the help!!! It made my day 😄

[zeblon]

You should be aware that difficulty of care payments are usually NOT reported on any tax form. In other words, you shouldn't be getting a W2. You simply ignore the DoC payments on your tax return. From the IRS notice on DoC payments:

• Generally the payor should not issue a Form W-2 or Form 1099-MISC Miscellaneous Income if they know the difficulty of care payments are excludable from your income. If you receive a Form W-2 or 1099-MISC reporting excludable difficulty of care payments, notify the payor that you are choosing to exclude the payments from your gross income. They should file and issue a corrected Form 1099-MISC or Form W-2C Corrected Wage and Tax Statement. Otherwise, use the previous information to report the income and exclusion.

In my experience (which is admittedly limited to my own situation and a handful of conversations with others), the organizations that make difficulty of care payments are already familiar with this policy and will automatically do the right thing and NOT send you a W2 or a 1099-MISC. If you are getting a W2, it would be worth talking to the source of your payments to be sure it actually does qualify as DoC, and if so, get them to correct it in their system. You don't want to inadvertently declare something as difficulty of care if it's actually wages.

[haruhiakanemolly]

That makes total sense. Thank you very much for the easy to understand explanation. I really really appreciate it!!!

[haruhiakanemolly]

@zeblon 

[detatafamily]

I followed your procedure, TurboTax says the number has to be a positive number, and it won’t let me e-file. I called TurboTax and the gentlemen said I would have to mail it in. Thanks a lot. [PII removed]

[detatafamily]

I had followed the directions and it does take out the “Difficulty of Care “ income. However, when I try to e-file, TurboTax says “CHECK THIS ENTRY WAGES, SALARIES &TIPS WORKSHEET:TP OTHER EARNED INC SHOULD NOT BE LESS THAN ZERO “.  TurboTax will not let me e-file. PLEASE HELP!

[CatinaT1]

The entry for IHHS income changed this year. You will enter your W2, even though it shows $0 in box 1. This will also allow you to claim earned income credit if you choose.

Since you are getting this error, I would try deleting the W2 and re-entering it. There may be something hung up in the W2. Also, clear your cookies and cache or try a different browser.

TurboTax can exempt income under Notice 2014-7 per the IRS instructions. This Notice provides that certain payments received by an individual care provider under a state Medicaid Home and Community-Based Services Waiver (Medicaid waiver) program, are difficulty of care payments and excludable as income. You can choose to use this income to calculate Earned Income Credit. Regardless, the income will remain non-taxable.  

    

This is how you will enter your W2: 

1. Sign into TurboTax Online, click Continue your return, then pick up where I left off (if you are using TurboTax CD/ Download, then just open your return on your computer);  
2. Click on Federal from the menu on the left-hand side and then click on Wages & Income at the top;  
3. Click Edit/Add next to Job (W-2);   
4. click on Add a W-2; and enter the information as reported on your W-2.  
5. After you have entered all your W-2s, you will see a screen that looks like this, asking for uncommon situations. Make sure you check the box for Nontaxable Medicaid waiver payments.   

You will then get to choose if you want to include the income for Earned Income Credit or not.  

For more information, refer to IRS Notice 2014–7, 20144 I.R.B. 445 and the IRS FAQs.