She began living with me in May 2018. I began receiving financial support for her in-home care in September 2018. Do I count this as income as it goes directly back to her in the form of medications, transportation, groceries, clothing, etc.
No. It is neither reportable or taxable.
TurboTax can exempt income under Notice 2014-7 per the IRS instructions. 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.
If these payments are paid to you in box 1 of form W-2 (they should not), first try to get a corrected Form W-2 from the payer. If you cannot get a corrected Form W-2, follow these steps:
Do not enter the W-2 in the Wages & Salaries topic. Instead enter it as Other Reportable Income under the Miscellaneous Income section. Take the following steps:
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);
Click on Federal Taxes at the top of the screen;
At the bottom of Your Income box pick the option in blue to help me add other income, then jump to full list;
Scroll down the page to the last section titled: Less common Income and click show more;
Select start or update next to the last topic titled Miscellaneous Income, 1099-A, 1099-C;
Scroll down to the last option titled Other reportable income and select start or edit;
When it asks, "Any other reportable income?" say yes then you will make two entries:
Your first entry description would be W-2 EIN # (enter EIN number from W-2) Box 1 Medicaid W-2 EIN # (enter EIN number from W-2) Box 1 Medicaid
Next you click "Add Another Miscellaneous Income Item," and enter this 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 Form 1040.
If your W-2 has federal or state taxes withheld, you can enter these amounts in the Deductions & Credits section under Other Income Taxes as Withholding not already entered on W-2.