On January 3, 2014, the Internal Revenue Service issued Notice 2014-7, 2014-4 I.R.B. 445. Notice 2014-7 provides guidance on the federal income tax treatment of certain payments to individual care providers for the care of eligible individuals under a state Medicaid Home and Community-Based Services waiver program described in section 1915(c) of the Social Security Act (Medicaid Waiver payments). Section 1915(c) enables individuals who otherwise would require care in a hospital, nursing facility, or intermediate care facility to receive care in the individual care provider’s home. The notice provides that the Service will treat these Medicaid waiver payments as difficulty of care payments excludable from gross income under § 131 of the Internal Revenue Code.
What this means is if your brother would otherwise be unable to live alone or would be institutionalized without your care, you can not pay taxes on the money you are paid for caring for him.
The only issue I am unsure about is whether it matters that you are paid by an agency instead of from the state. I suggest you contact his caseworker or your agency for clarification on that.
I am including a link to some FAQs the IRS has answered that may be close to your situation.
https://www.irs.gov/individuals/certain-medicaid-waiver-payments-may-be-excludable-from-income
