IHSS "difficulty of care" payments, referred
to as Medicaid Waiver payments, are excluded from gross income pursuant to IRC
section 131(c). These difficulty of care payments are defined as compensation
to a foster care provider for providing additional care for nonmedical support
services under a plan of care to an eligible individual (whether related or
not) living in the provider's home.
This means that the wages received by an IHSS provider
who lives with the recipient of those services are not considered "gross
income" for federal income tax purposes.
California conforms to IRC section 131 under Revenue
and Taxation Code (R&TC) section 17131, so it follows IRS guidance,
including IRS notices, concerning the provision. As such, IHSS difficulty of
care payments made to an individual living with the person for whom he or she
provides care will be excludable in California.
Yes, 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 Waiver Payments, and
enter the Box 1 amount as a positive number.
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.
