TurboTax can exempt income under Notice 2014-7 per the IRS instructions. Under this Notice certain Medicaid waiver payments are treated as difficulty-of-care payments when received by an individual care provider for care of an eligible individual (whether related or unrelated) living in their home. If you are not sure if your payments qualify for the waiver then ask the payer for confirmation.
Medicaid Waiver Payments for In-Home support services are excludable from gross income and should not be included in your earned income.
If these payments are paid to you in box 1 of form W-2 (they should not), first try to get a corrected Form W-2 from the payer. If you cannot get a corrected Form W-2, follow these steps:
If your W-2 has federal or state taxes withheld, you can enter these amounts in the Deductions & Credits section under Estimates and Other Taxes Paid, or Other Income Taxes Paid as Withholding not already entered on W-2.
Additionally, you may file a Form 1040X, Amended U.S. Individual Income Tax Return, if you received payments described in the notice in an earlier year and the time for claiming a credit or refund has not expired. A taxpayer generally may file a claim for refund within three years from the date the return was filed or two years from the date the tax was paid, whichever is later.