2023 medicaid waiver payments on W2 and 1099; both correctly deducted from Federal AGI but California return deducts the 1099 income twice - once with federal AGI and again on Schedule CA column B line 1d

[PetuniasAuntie]

2023 medicaid waiver payments on W2 and 1099; both correctly deducted from Federal AGI but California return deducts the 1099 income twice - once with federal AGI and again on Schedule CA column B line 1d.

Schedule CA column B line 1d is only for "IHSS providers who received supplementary payment for sales tax on services they provided" according to the 2023 Form 540 instructions pg 58.

On my federal return:

a) the W2 medicaid waiver payments are reported on 1040 Line 1a and subtracted on Schedule 1 Line 8z with the note "IRS Notice 2014-7 excludable income [with amount included]" written to the left on line z; and

b) the 1099 payments are reported on 1040 line 1d and subtracted on Schedule 1 Line 8s. This correctly subtracts them both from the federal AGI.

Then, the TT automatically generated Schedule CA correctly applies the net Federal AGI that subtracts both medicaid waiver amounts but then, by TT also automatically putting the 1099 amount in Schedule CA column B line 1d, it subtracts the 1099-reported payments again, doubling the amount subtracted in the net CA AGI.

How do I fix this????

I have carefully walked through a manual processing of my tax returns and followed advice read here in the TurboTax community about how to handle these payments. I don't see any errors in my handling of these payments and I see no way to  override what TT did to my state return.

To me it appears that there is a bug in the TT California form - that it is applying the criteria for reporting payments in Schedule CA column B line 1d globally to non-W2-reported payments even when they are not "supplementary payments", which instructions say are only to include sales tax paid to IHSS workers (a very narrow category that doesn't apply to most IHSS providers, including me.)

I urgently need help to sort this out. I'm trying to get help through TT Advantage (I am a member) but so far they have been unable to even understand the issue let alone help me. I'm waiting for a call back from an advisor but am losing hope that their process will connect me with an expert with relevant experience. So I'm trying here because I do see experts weighing in on issues like this! With hope and gratitude to those who will take the time to reply!!

[MonikaK1]

IHSS income is normally reported on Form W-2. What type of 1099 did you receive relating to IHSS?

If you entered a Form 1099G for Unemployment, the California program will automatically exclude it from California income.

The help article for IHSS Forms W-2 was recently updated again. We are finding this year that different counties / payers are identifying the IHSS / difficulty of care income differently.

Many Forms W-2 issued for IHSS - IRS Notice 2014-7 income now show zero in Box 1, to indicate that it isn't subject to Federal income tax, but show the entire amount of wages paid in Box 3, Social Security wages. If you have an amount in Box 3, and you might qualify for Earned Income Credit or Additional Child Tax Credit, follow the instructions in this help article, which were recently updated:

1. Sign in to TurboTax and open your return.
2. Select Search, enter w-2, and select Jump to w-2.
3. Enter all your W-2 info as shown on your form, except Box 1 (this is assuming that the W-2 Box 1 is blank or zero).
4. Enter the amount reported in box 3 of your W-2 in Box 1.
5. On the Let’s check for uncommon situations screen, select the box next to Nontaxable Medicaid waiver payments that qualify as difficulty of care payments.
6. Enter the amount of Medicaid waiver payments into the difficulty of care payment you received from IHHS box.
   • This is the same amount reported in boxes 3 and 5 of your W-2.
   • Your payments are nontaxable, but TurboTax uses this number to calculate credits you may qualify for.
7. When you get to the Earned Income Credit section in Deductions and Credits, we’ll ask if you want to add your Medicaid waiver payment to your income for this credit. You can answer based on what benefits you most.

If you follow these steps, you are entering income and then backing out the income, so that it isn't backed out twice, and so that you are not entering a zero in Box 1 which may prevent e-filing.

If you don't have any dollar amounts on your W-2, you qualify to exclude the income under IRS Notice 2014-7, and you don't expect to qualify for Earned Income Credit or Additional Child Tax Credit, then you don't need to enter the W-2 at all.

[PetuniasAuntie]

Dear Monika,

Thank you for your response. My apologies, but the income I was asking about is not from IHSS (I only mentioned IHSS because it is called out in the 540 Schedule CA instructions I cited; I am also separately my daughter's IHSS provider, but I do not receive a W2 from them due to having established a live-in self-certification for tax exempt status some years ago.)

Both the W2 and the 1099-MISC I wrote about are Regional Center Medicaid Waiver payments under the California Self-Determination Program (SDP) and they were created by the Financial Management Service (FMS) who supports my daughter's SDP. I am a provider under her plan in two roles, one reported on a W2, the other one a 1099-MISC. Both documents are 'standard' documents, with amounts in box 1 of the W2 and box 3 of the 1099, and so on. They need to be reported on my tax returns. Under the SDP, the FMS agencies who create these forms could probably establish a process for allowing providers to self-certify that the payments involved are exempt from taxation under difficulty-of-care medicaid waiver rules, but they are not current set up to do that.

So my post, here, is about Regional Center SDP payments through an FMS that are reportable but need to be backed out correctly on both the federal and state returns. I described the issue I am trying to resolve - the double-back-out of the 1099 payments - correctly in detail and would love to know what you recommend I do about the issue I wrote about.

I appreciate all the detail you provided and am hoping for similar guidance on the problem I am trying to solved. Thanks again!

[MonikaK1 · Accepted solution]

Thank you for the clarification.

If you enter the Medicaid Waiver 1099 as recommended in this help article:

1. Sign in to TurboTax and open your return.
2. Select Federal, then Wages & Income.
3. Under Less Common Income, select Start or Revisit next to Miscellaneous Income, 1099-A, 1099-C.
4. Select Start or Revist next to Other income not already reported on a Form W-2 or Form1099.
5. Answer Yes to Did you receive any other wages?  and Continue.
6. Continue through the screens, leaving the boxes blank until you get to the Certain nontaxable Medicaid waiver payments not reported on Form W-2 or 1099 screen.
7. Enter the amount of Medicaid waiver payments and Continue.
8. Finish entering the rest of your income.
9. When you get to the Earned Income Credit section in Deductions and Credits, we’ll ask if you want to add your Medicaid waiver payment to your income for this credit. You can answer based on what benefits you most.

...then the amount is entered as income and deducted as an adjustment to income on the Federal return.

I just tested this and I got the same result you did with the California return: the amount is deducted again from California income, even though the Federal Adjusted Gross Income is used as a starting point.

I am reporting this issue for further testing and investigation.

For now, to correct your California return, you can go to the California interview in TurboTax; on the screen, "Here's the income that California handles differently", select Other Adjustments to Income. Enter a description and the amount you identified as an Addition to California income. 

[PetuniasAuntie]

 Dear Monika,

Thank you for running a test repeating the process I used. Wow! I'm surprised that you were able to confirm the problem I found that appears to be a bug. It is good to know my process was sound but distressing to find I've uncovered what is now looking even more like a bug in TT's California return.

Thank you, too, for reporting the situation to TT. I couldn't find any instructions about how to submit a bug report to TT. I looked. I wrote that off to their confidence in the accuracy of their products and that, along with their 100% accurate guarantee made me assume I was making a mistake somewhere and only seeing the appearance of a bug, not an actual bug.

Thank you for offering a way to correct the California return to get around this issue for the present. I have used it and so far it appears to resolve the bottom line issue with my California return. I'm going to move on and complete my returns with that fix in place.

I appreciate you very much - your expertise, your level of engagement in the TT community, your willingness to run tests, your detailed guides to fixing problems, your detailing of workarounds when TT doesn't work as it should - and to do all that in a timely way within two days of the tax deadline! Just awesome! Thanks for everything!