My MIL has a W2 for non-taxable Medicaid Waiver payments. Box 1 is $50K. Boxes 3/5 are $5K. Is the 5K of this taxable? How do I put this in the software?

[McKenna3435]

I would think that normally the W2 would have a blank box 1 and I am not sure why on a non-taxable benefit, SS and medicare taxes would be taken out (based on $5K and not the entire $50K) unless this portion of the payments was considered taxable.  Not sure how to account for this in the software - thank you.

[CatinaT1]

Tax-Exempt Medicaid Waiver Payments from IHHS  

TurboTax can exempt income under Notice 2014-7 per the IRS instructions for Medicaid Waiver payments from IHHS. 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. Additionally, you can choose to use this income to calculate Earned Income Credit. Regardless, the income will remain non-taxable.     

This tax-exempt income can be reported to you differently depending on the State and County you live in. You might receive a W-2, 1099, and no form at all.   

See the instructions below for how to report this depending on how the income was reported to you.  

If you received a W-2 with $0 in Box 1:  

1. Sign in to TurboTax Online, click Continue to 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 Taxes, and then click on Wages & Income;     
3. Under Wages and Income, click Start;      
4. Click on Work on my W-2, and enter the information as reported on your W-2.     
5. After entering all your W-2s, you will see the screen, Let’s check for uncommon situations. Next to Nontaxable Medicaid waiver payments, check the box.  
6. You will enter the amount of Medicaid Waiver Payments into the box asking for the total amount of difficulty of care payment you received from IHHS. This will be the same amount reported in Boxes 3 and 5 of your W-2.  
7. When you get to the Earned Income Credit section under the  Deductions and Credits portion of your return, you will be asked if you want to add your Medicaid waiver payment to your income for this credit. You can try it both ways, including it and excluding it from the calculation for the credit and see which way benefits you most.  

If you received a 1099 or no form:  

1. Sign in to 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 Taxes, and then click on Wages & Income;     
3. Scroll down to Less Common Income;       
4. Click on Start next to Miscellaneous Income, 1099-A, 1099-C.  
5. Click on Start next to, Other income not already reported on a Form W-2 or Form 1099;      
6. Answer Yes to Did you receive any other wages?;      
7. Leave blank the box for Wages earned as a household employee and click continue;  
8. Leave blank the box for Sick or disability pay and click continue;       
9. Enter the amount of Medicaid waiver payments on Certain nontaxable Medicaid waiver payments not reported on Form W-2, and click Continue.  
10. When you get to the Earned Income Credit section under the  Deductions and Credits portion of your return, you will be asked if you want to add your Medicaid waiver payment to your income for this credit. You can try it both ways, including it and excluding it from the calculation for the credit and see which way benefits you most.  

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

[McKenna3435]

Thank you Catalina, that is very helpful.  How about a situation where box 1 is $50K and Boxes 3 and 5 are $5K.  Is the medicaid waiver payment the $50K or the $5K  Do I still put the 50K in the software where box 1 income is normally put, or should I leave it blank?  Thank you.

[CatinaT1]

It is odd they are different numbers. Do you think it could be a typo? Is it $50,000 and $5,000 exactly? Did you get paid $50,000? You could ask the issuer just to be sure, but if you don't want to, you are fine to enter everything just as it is and follow the instruction I provided. 

[McKenna3435]

Yes, they are definitely different numbers.  It is $50K and change and $5K and change, which I just rounded for the purposes of the conversation.  I appreciate the advice.  She definitely got $50K, which just makes me very curious about the $5K.  Why would they take SS and medicare taxes out of a non-taxable benefit, (they took 6.5% of the 5K) unless the real MWP is the $50K minus the $5K.  All very curious to me.   Appreciate your thoughts.  Regards

Jim

[CatinaT1 · Accepted solution]

Just because it is not taxable for income tax purposes, doesn't mean it is non-taxable for Social Security and Medicare purposes. Your state may have a limit on how much of the total amount can be taxed for Social Security and Medicare. 

[McKenna3435]

Thanks Cataline - all very helpful.

[jmeyer6373]

I did not know that we could deduct my spouses Medicaid waiver income for care of my son.  When I am trying to do an amended return, I do not get the "Let's check for uncommon situations" question after entering my W2s.  I do not see how to enter my spouse's Medicaid waiver deduction.  The W2 came with all the income for the Medicaid waiver income in box 1, so I need to deduct it. I could only enter it in the other income (line8Z)  as a negative number.  How do I get to the uncommon situations tab so it will show in the correct line (8S)?

[JotikaT2]

The screen should pull up after entering all of your W-2 wages.  A separate screen will pull up that says "Let's check for uncommon situations" as shown below.  This is the screen where you should check the box to the left of Nontaxable Medicaid waiver payments that qualify as difficulty of care payments.

Please see this FAQ for a step by step guide to help you with the input.

@jmeyer6373