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. These payments are excluded from gross income and shouldn't be included in your earned income.
If these payments are incorrectly paid to you in Box 1 of a W-2, first try to get a corrected W-2 from the payer. If you can't get a corrected W-2, follow one of these processes:
Exclude these payments from your return
Don't include this W-2 in your return. The IRS may contact you to explain why the payments were not included on your tax return. Explain that the payments are excludable from gross income under Notice 2014-7 as payments for in-home support services.
Don't enter the W-2 in the WagesSalaries section
Instead, enter them this way:
- In Income Expenses, go to the Less Common Income section and select Start next to Miscellaneous Income, 1099-A, 1099-C.
- On the next screen, select Start next to Other Reportable Income and answer Yes on the next screen.
- Make two entries on the Other Taxable Income screen:
- Make your first entry description W-2 EIN # [enter EIN number from W-2] Box 1 Medicaid Waiver Payments and enter the box 1 amount as a positive number.
- Next select Add Another Miscellaneous Income Item and enter the 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 1040.
If your W-2 has federal or state taxes withheld, enter these amounts as follows:
- In Deductions Credits, go to the Estimates and Other Taxes Paid section and select Start next to Other Income Taxes.
- On the next screen, answer Yes on the next screen if necessary.
- On the Other income taxes screen, go to the Other Income Taxes Paid in 2018 section.
- Select Start next to Withholding not already entered on a W-2 or 1099, and enter the amount on the next screen.
For more information, refer to IRS Notice 2014–7, 20144 I.R.B. 445.
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