How states handle Difficulty of Care

[julesd8737]

Hello everyone!

I received a W2 for the Difficulty of Care income I receive to care for my adult son with autism. I was told I was exempt from both federal and state taxes so no taxes were taken out for state or federal. In box 1 of the w2, Federal wages were reported as 0, however, state wages in box 16 showed the total amount of income I made and I am now owing Pennsylvania $719. Are Difficulty of Care payments truly state exempt? Is it a state by state decision? I don't know how to proceed. Thank you! 

[CatinaT1]

Tax-Exempt Medicaid Waiver Payments from IHHS  

TurboTax can exempt income under Notice 2014-7 per the IRS instructions for Medicaid Waiver payments from IHHS. 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. Additionally, you can choose to use this income to calculate Earned Income Credit. Regardless, the income will remain non-taxable.     

This tax-exempt income can be reported to you differently depending on the State and County you live in. You might receive a W-2, 1099, and no form at all.   

See the instructions below for how to report this depending on how the income was reported to you.  

If you received a W-2 with $0 in Box 1:  

1. Sign in to TurboTax Online, click Continue to your return, then pick up where I left off (if you are using TurboTax CD/ Download, then just open your return on your computer);     
2. Click on Federal Taxes, and then click on Wages & Income;     
3. Under Wages and Income, click Start;      
4. Click on Work on my W-2, and enter the information as reported on your W-2.     
5. After entering all your W-2s, you will see the screen, Let’s check for uncommon situations. Next to Nontaxable Medicaid waiver payments, check the box.  
6. You will enter the amount of Medicaid Waiver Payments into the box asking for the total amount of difficulty of care payment you received from IHHS. This will be the same amount reported in Boxes 3 and 5 of your W-2.  
7. When you get to the Earned Income Credit section under the  Deductions and Credits portion of your return, you will be asked if you want to add your Medicaid waiver payment to your income for this credit. You can try it both ways, including it and excluding it from the calculation for the credit and see which way benefits you most.  

If you received a 1099 or no form:  

1. 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);     
2. Click on Federal Taxes, and then click on Wages & Income;     
3. Scroll down to Less Common Income;       
4. Click on Start next to Miscellaneous Income, 1099-A, 1099-C.  
5. Click on Start next to, Other income not already reported on a Form W-2 or Form 1099;      
6. Answer Yes to Did you receive any other wages?;      
7. Leave blank the box for Wages earned as a household employee and click continue;  
8. Leave blank the box for Sick or disability pay and click continue;       
9. Enter the amount of Medicaid waiver payments on Certain nontaxable Medicaid waiver payments not reported on Form W-2, and click Continue.  
10. When you get to the Earned Income Credit section under the  Deductions and Credits portion of your return, you will be asked if you want to add your Medicaid waiver payment to your income for this credit. You can try it both ways, including it and excluding it from the calculation for the credit and see which way benefits you most.  

For more information, refer to IRS Notice 2014–7, 20144 I.R.B. 445 and the IRS FAQs.  

[julesd8737]

Thank you for your response. I do understand how it works with federal wages. My question surrounds filing with the state. There is very little information out there and the Pa Department of Revenue did not have the answer for me either. They only said that if income is reported in box 16, they consider it taxable. And they don't have state tax forms allowing me to exclude that amount citing IRS Notice 2014-7. 

[MonikaK1 · Accepted solution]

According to this Pennsylvania Department of Revenue webpage, difficulty-of-care / Medicaid waiver payments are includible as income even though they are not taxed on the Federal return.

[jsoutherly85]

What if it's not giving you an option to click difficulty of pay ? Also at the end its telling me I have to mail it in since line 1 is a 0?? I'm in va can I just not add my w2 since it's tax exempt anyways??

[MonikaK1]

If you have a W-2 with zero in Box 1, and you don't have another reason to enter the W-2 (such as qualifying for Earned Income Credit), you don't need to enter the form at all.

Please see this help article for more information on this topic. We are currently reviewing the article for further updates.