Per IRS Notice 2014-7, payments from a state Medicaid Home and Community-Based Services program are considered "difficulty of care" payments and are specifically excluded from gross income for income tax purposes. Please see this IRS article for more information.
If you did not receive a W-2 or other tax form, you do not need to report payments from a state Medicaid Home and Community-Based Services program.
If you received a W-2 or other tax form (such as a 1099), you should enter the information in TurboTax and then show an offset for this entry so that you will not be taxed on this income. By entering the information into TurboTax, you will reconcile your tax return with what the IRS has received and then show the corresponding offset to explain why it is not taxable.
In a recent court case, it was ruled that Medicaid Waiver Payments are considered "earned income" for purposes of calculating the earned income tax credit and other credits. If you choose to show your payments as earned income, you can include the payments on line 1 of Form 1040 (even if not reported on a W-2) in order to claim a credit. Please see IRS Form 1040 Instructions (page 21) for more information. Listed below are instructions on how to enter your Medicaid Waiver Payments in TurboTax:
- Log into TurboTax and click on any topic to continue
- Click on Federal from the menu on the left-hand side and then click on Wages & Income at the top
- If you choose to report your payments to receive a credit: Click Edit/Add next to Job (W-2) and then click on Add a W-2.
- If you actually received a W-2 for your Medicaid Waiver Payments, enter the information as reported on your W-2. Enter the amount you received for Medicaid Waiver Payments in Box 1 (even if this amount is not reported in box 1 of your W-2.)
- If you did not receive a W-2, per IRS Form 1040 Instructions, you may still enter the amount of Medicaid Waiver Payments in Box 1 for the purpose of claiming the credit.
- If you received a 1099 and choose not to report it as earned income to receive a credit: Scroll down to "Less Common Income" and click on Show More.
- Click on Start or Revisit next to Miscellaneous Income, 1099-A, 1099-C. Then click on Start or Revisit next to Other reportable income and select Yes
- Enter "Medicaid Waiver Payments, EIN # (enter EIN number from 1099)" in the description box and then enter the amount from your 1099. Click Continue.
- To enter the offset for the payments (whether you chose to report as earned income or a 1099): Click on Wages and Income at the top. Scroll down to "Less Common Income" and click on Show More.
- Click on Start or Revisit next to Miscellaneous Income and then click on Start or Revisit next to Other Reportable Income and select "Yes" or "Add Another Income Item" if applicable
- In the "Description" section, enter "IRS Notice 2014-7 excludable income" and in the "Amount" section, enter the W-2 box 1 amount (or amount of Medicaid Waiver Payments) as a negative (-) number
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