How and where to Post claim "IRS Notice 2014-7 excludable income"

[karl1957schultz]

How and where do I enter IRS Notice 2014-7 excludable income on my Federal Return?,  I am totally confused and don't know how to proceed.  I'm getting conflicting guidance.

[markale88]

Do you follow the same instructions for an amended return or do you just enter the negative income on the 1099-misc form?

[dimusik]

when I enter negative number to a miscellaneous income item SmartCheck complains that negative numbers are not allowed there and doesn't let me file the return.

[SueT]

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:

• Do not enter the W-2 in the Wages & Salaries topic.
  Instead enter it as Other Reportable Income under the Miscellaneous Income section. 
• To get to this section you will click on Federal Taxes, Wages & Income, then Less Common Income, and start next to the last option for Miscellaneous Income, 1099-A, 1099-C. 
• Next click start next to the last option for Other Reportable Income click yes and follow the instructions below. 
• You will make two entries:

1. Your first entry description would be W-2 EIN # (enter EIN number from W-2) Box 1 Medicaid Waiver Payments, and enter the Box 1 amount as a positive number.
2. Next you click "Add Another Miscellaneous Income Item," and enter this description: IRS Notice 2014-7 excludable income and enter the W-2 Box 1 amount as a Negative (-) number. This both shows and explains removing the W-2 income, placing a zero on Line 21 of your Form 1040.

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.

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

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.  

[drichardt]

If you say that employers should not include them in Box 1, how is the employer supposed to record these payments on a W-2? There is no code for Box 12 to reconcile a non-taxable payment such as this.

[dimusik]

when I enter negative number to a miscellaneous income item SmartCheck complains that negative numbers are not allowed there and doesn't let me file the return.

[Steve37]

No offense, but that answer is half right.

It is true that Medicare waiver payments are excludable from taxable income, but includable in earned income.

In Feigh v. Commissioner, 152 TC No. 15 (May 2019); available at: https://www.ustaxcourt.gov/UstcInOp/OpinionViewer.aspx?ID=11863. This case is also discussed at: https://www.currentfederaltaxdevelopments.com/blog/2019/5/15/irs-improp[product key removed]nts-were....

Paraphrasing, the Tax Court found in May 2019 that the IRS has excluded Medicaid Waiver Payments and not Congress, and that otherwise such payments are includable in earned income for purposes of the Earned Income Tax Credit, thus providing a double benefit in this case providing for the refundable Earned Income Tax Credit and Child Tax Credits.

Here and in  "Qualified Medicare waiver payments on W-2 show as earned earned income for EIC (https://ttlc.intuit.com/community/bugs-and-error-messages/help/qualified-medicaid-waiver-payments-on...), both want you to enter the W-2 in other income.  While this may fly with the IRS because all income reported to them is reported on a taxpayer's Form 1040,  but, as a tax professional, the best way to enter this is to include the W-2 in wages and an offset in other income.

[ratt1967]

I have income from a community based Medicaid program for my 2 disabled children who live with me. I have been told this income is federally tax exempt. I do not know how or if I need to report this income on my tax forms. 

[julie24mn]

https://ttlc.intuit.com/community/bugs-and-error-messages/help/qualified-medicaid-waiver-payments-on...

I did this last year with no issues other than in my state (MN), I had to mail my forms in, was not able to do electronically.  I was able to file federal electronically, just not my state.  Turbo Tax is the only program I have found that allows me to enter the 2014-7 in a way that doesn't flag me for audit.

[BarbaraW22 · Accepted solution]

Per IRS Notice 2014-7, payments from a state Medicaid Home and Community-Based Services program are considered "difficulty of care" payments and are specifically excluded from gross income for income tax purposes. Please see this IRS article for more information.

If you did not receive a W-2 or other tax form, you do not need to report payments from a state Medicaid Home and Community-Based Services program.

However, you can choose to include Medicaid Waiver Payments as Wages on line 1 of Form 1040 (even if not reported on a W-2) in order to claim a credit. In a recent court case, it was ruled that Medicaid Waiver Payments are considered "earned income" for purposes of calculating the earned income tax credit. Please see instructions below for how to enter Medicaid Waiver Payments in TurboTax.

If you received a W-2 form, please follow the steps below to enter it on your tax return. You will enter it as wages and then enter an adjustment on Schedule 1, line 8 so the payments are not included in taxable income. Please see the instructions below:

1. Log into TurboTax and click on any topic to continue
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) and then click on Add a W-2
4. If you received a W-2 for your Medicaid Waiver Payments, enter the information as reported on your W-2. Enter the amount you received for Medicaid Waiver Payments in Box 1 (even if this amount is not reported in box 1 of your W-2.) If you did not receive a W-2, per IRS Form 1040 Instructions, you may still enter the amount of Medicaid Waiver Payments in Box 1 for the purpose of claiming the credit.
5. Continue through the screens until you get back to "Wages and Income" section and then scroll down to Less Common Income and click on Show More
6. Click on Start or Revisit next to Miscellaneous Income and then click on Start next to Other Reportable Income and select "Yes"
7. In the "Description" section, enter "IRS Notice 2014-7 excludable income" and in the "Amount" section, enter the W-2 box 1 amount (or amount of Medicaid Waiver Payments) as a negative (-) number

NOTE: This will both show the W-2 on your return and explain why it is not taxable.

@ratt1967 

@Yonghang2019 

[Edited 02/11/20 | 7:12pm PST]

[ratt1967]

I did receive a w2.

[JamesG1]

IRS Notice 2014-7 can be found at this link.  Click on the hyperlink Notice 2014-7 in the center of the page.

Certain Medicaid Waiver Payments for In-Home support services are excludable from gross income and should not be included in your taxable income.  This is the case even if you have received a W-2 for performing these services.

If you have received a W-2, this help explains how to enter the income and then remove it from your taxable income.

Be sure to retain all your documentation.  The IRS is likely to ask questions about this income at some later time.

[Yonghang2019]

Hello,

If I received a 1099 instead of W-2 for a state Medicaid Home and Community-Based Services program, how do I need to enter?

Thanks,

[DoninGA]

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@Yonghang2019 wrote:

Hello,

If I received a 1099 instead of W-2 for a state Medicaid Home and Community-Based Services program, how do I need to enter?

Thanks,

---

READ the answer directly above your post.

[Yonghang2019]

@DoninGA The post above mine doesn't discuss about 1099.