Yes. A recent court case now makes Medicare waiver payments eligible for EIC, even though they are not taxable*.
EDITED 3/3/23: New this year (2022): 1. The IRS has provided a place to deduct (line 8s of Schedule 1) the nontaxable income (but still allow you to claim the Earned Income credit based on that income) and 2.TurboTax now smoothly handles it. Enter you W-2, as received, at the W-2 screen, in TurboTax. At the end of the W-2 screens, you will encounter a screen titled "Let's check for uncommon situations". Check the box at "Non taxable Medicare waiver payments that qualify as difficulty of care payments". On the next screen, indicate the amount (usually "all of it").
Old Answer:
It's a little tricky entering in TurboTax. If you got a W-2 for the IHSS, enter it at the W-2 screen.
Then to back out the non-taxable part by making a separate negative entry as follows:
In TurboTax (TT), enter at:
- Federal Taxes tab (Personal in Home & Business)
- Wages & Income
Scroll down to:
-Less Common Income
-Misc Income, 1099-A, 1099-C
- On the next screen, choose – Other reportable income
- On the next screen, click yes
- On the next screen, you'll get blanks to enter the amount and a description. Enter the description IRS Notice 2014-7 excludable income and enter the W-2 box 1 amount as a negative (-) number. This places an offset on line 8 of Schedule 1, making the income not taxed, but still eligible for EIC.
One requirement, for the income exclusion, is that it must be paid through a "Medicaid Waiver Program". Another requirement is that you live with the care recipient .
*The Instructions to Form 1040 now state that you report it as taxable income on Line 1, then 'back it out' on Line 8 (line 8z of Schedule 1, on more recent tax forms). That way, that income will qualify for the Earned Income Credit.
Certain Medicaid waiver payments you received for caring for someone living in your home with you may be nontaxable. If these payments were reported to you in box 1 of Form(s) W-2, include the amount on Form 1040 or 1040-SR, line 1. Also, include on line 1 any Medicaid waiver payments you received that you choose to include in earned income for purposes of claiming a credit or other tax benefit, even if you did not receive a Form W-2 reporting these payments. On line 8, subtract the nontaxable amount of the payments from any income on line 8 and enter the result. If the result is less than zero, enter it in parentheses. Enter “Notice 2014-7” and the nontaxable amount on the dotted line next to line 8. For more information about these payments, see Pub. 525.
