Even though Medicaid Waiver Payments are not taxable for federal income tax purposes, the payments can be used to calculate the earned income tax 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. A taxpayer 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 the credit. Then an adjustment is entered on Schedule 1, line 8 so the payments are not included in taxable income. Please follow the steps below to enter Medicaid Waiver Payments:
- Log into TurboTax and click on any topic to continue
- Click on Federal from the menu on the left-hand side and then click on Wages & Income at the top
- Click Edit/Add next to Job (W-2) and then click on Add a W-2
- 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.
- Continue through the screens until you get back to the "Wages and Income" section and then scroll down to Less Common Income and click on Show More
- Click on Start or Revisit next to Miscellaneous Income and then click on Start next to Other Reportable Income and select "Yes"
- 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.
Your Social Security Disability Insurance payments are not considered "earned income" and cannot be used to claim the Earned Income Tax Credit. Please see this link to "Disability and Earned Income Tax Credit" for more information.
Your Social Security Disability Insurance payments may be taxable if your other income (including tax-exempt interest) plus half of your social security benefits exceed $25,000 for single filers or $32,000 for married filing jointly. However, your Medicaid Waiver Payments would not be considered as other income for this calculation.
