IHSS EXCLUDED INCOME AND EIC

[Jess106]

My w2 shows a 0 in box one, but my actual income in boxes 2 and 3. This is because I am a tax exempt IHSS provider. How do I enter this on my taxes correctly to recieve earned income credit? Do I put it in with my other w2 or in the miscellaneous section?

[Bsch4477]

enter your W-2 as a regualar W-2. 

Then make a separate negative entry as follows:

1. In Income go to the Less Common Income section and select Start next toMiscellaneous Income, 1099-A, 1099-C.
2. On the next screen, select Start next to Other Reportable Income and answer Yes on the next screen.  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.

[Jess106]

I keep seeing people say that, but my wages and salaries box is already 0 to show it isn't taxable. So I don't want to deduct it, I want to add the income. So should I enter the w2 as it is and then write the income in miscellaneous with a note? It seems like turbo tax isn't set up for this situation

[MarilynG1]

If your IHSS W-2 shows $0 for wages, you don't need to enter it in TurboTax; just keep it for your records.

However, if you need to include the income for a credit you want to claim, then don't enter the W-2 but enter the income as Other Reportable Income with the description of W-2 EIN # (enter EIN number from W-2) Box 1 Medicaid Waiver Payments, and then make a negative entry with the description IRS Notice 2014-7 excludable income in the same section  so you won't be taxed on the income.  

Click this link for more info on IHSS Earning Exclusion for Credit. 

[Bsch4477]

You wrote that there are amounts in box 2 and 3. Was there withholding?

[Bsch4477]

@MarilynG1  Although your suggestion excludes the income from tax it doesn’t solve the problem of including that income as earned income for EIC. Any idea how to do that?  Also if there was an amount on W-2 in box 2 (maybe that was a typo) the withheld amount has to be entered to get applied to any tax liability. 

[CatinaT1]

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.  

  

Since you received a W-2, you should enter the information in TurboTax and then show an offset for this entry so that you will not be taxed on the payments. This will reconcile your tax return with what the IRS has received and then show the corresponding offset to explain why it is not taxable. You will also be able to recover the federal and state taxes that were withheld from your payments. Please see the steps listed below to enter your W-2 into TurboTax. 

  

It is also important to inform you that a recent court case, ruled that IHSS payments and Medicaid Waiver Payments are considered "earned income" for purposes of calculating the earned income tax credit and other credits. Even though the income is not taxable for income tax purposes, a taxpayer can choose to show the payments as earned income to claim a credit. 

  

The instructions below include steps to enter the payments as earned income to receive a credit or to report them as unearned income. Either way the payments will not be subject to federal or state income taxes. 

  

1. Sign into 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 from the menu on the left-hand side and then click on Wages & Income at the top; 
   1. If you choose to report your payments to receive a credit:  
      1. Click Edit/Add next to Job (W-2);  
      2. click on Add a W-2; 
      3. enter the information as reported on your W-2. Enter the amount you received for IHSS Payments in Box 1 (even if this amount is not reported in box 1 of your W-2). 
   2. If you choose not to report it as earned income to receive a credit:  
      1. Scroll down to "Less Common Income";  
      2. click on Show More; 
      3. click on Start or Revisit next to Miscellaneous Income, 1099-A, 1099-C; 
      4. click on Start or Revisit next to Other reportable income; 
      5. select Yes 
      6. enter "In-Home Support Services Payments, EIN # (enter EIN number from W-2)" in the description box and then enter the amount from box 1 your W-2; 
      7. click Continue.  
3. To enter the offset for the payments (whether you chose to report as earned income or not):  
   1. Click on Wages and Income at the top of the screen; 
   2. scroll down to "Less Common Income"; 
   3. click on Show More; 
   4. click on Start or Revisit next to Miscellaneous Income; 
   5. click on Start or Revisit next to Other Reportable Income; 
   6. select "Yes" or "Add Another Income Item"; 
   7. 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 IHSS Payments) as a negative (-) number. 

  

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

[rulesareconfusing]

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@CatinaT1 wrote:

1. 1. If you choose to report your payments to receive a credit:  
      1. Click Edit/Add next to Job (W-2);  
      2. click on Add a W-2; 
      3. enter the information as reported on your W-2. Enter the amount you received for IHSS Payments in Box 1 (even if this amount is not reported in box 1 of your W-2). 

My W-2 shows 0 for Box 1 and Box 16. I didn't realize the 2022 Form 1040 was changed to have these payments on Line 1d instead of Line 1a. I entered the IHSS payments in Box 1 and Box 16 when adding the W-2. My return was accepted with the IHSS payments reported on Line 1a from the modified W-2 Box 1 amount. Do I need to amend the return to properly report it on Line 1d? Nothing else changes as far as I can tell. My 540 also has the IHSS payments in Line 12 from the modified W-2 Box 16 amount. It was also accepted, but I'm not sure if that is proper.

[CatinaT1]

Yes, you will want to amend your returns. This income is non-taxable.  The instructions changed this year and the instructions from my Jan post are outdated.

See this TurboTax FAQ for help with amending.   

You can e-file your 2022 amended federal tax return, but most states require amendments to be printed and filed by mail.   

You can check the status of your amended return here, but allow three weeks after filing for it to show up.   

These are the updated instructions:

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

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. Under Wages and Salaries, click Edit/Add next to Form W-2;     
4. Click on Add a 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 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. 

[rulesareconfusing]

@CatinaT1

I understand it's non-taxable, and it was properly excluded in Schedule 1. As noted, the only difference I can see is that it is on Line 1a instead of Line 1d and it shows in the W-2 Box 1 and 16 when the actual W-2 doesn't have it there. The credits, tax liability, refunds, etc. did not change.

So my questions are:

1. Is it bad to enter the W-2 with modified Box 1 and Box 16 numbers? I've seen it suggested in the past to get the software to work. I'm not sure how the tax agencies look at this though.
2. If the only thing I am changing in the amendment is reporting it on Line 1d instead of Line 1a and submitting the actual W-2's with 0 in Box 1 and 16, should it still be amended?
3.  For the California 540, should the non-taxable IHSS/Medicaid waiver income be included in Line 12 if it wasn't in W-2 Box 16? Is it wrong to include it there? People have suggested including it in the past to get the proper CalEITC. This year it seems it's not necessary, but is this grounds for requiring an amendment?

[CatinaT1]

1. It's okay, but in the future, I would use the updated instructions. This could result in a delay of processing your return.

2. No, I misunderstood that you had it excluded on Schedule 1, so my original concern was that you were paying taxes on income you didn't need to. No need to file an amendment for what line it was reported on.

3. As long as nothing changes regarding your tax liability or the credit, there is no need to amend. You did not pay income tax on the amount in Cali, right? And you received the EITC? If so, you are good!

[rulesareconfusing]

Thanks @CatinaT1 

Yes, I did not pay income tax for the amount in California, and I claimed the CalEITC. The return was accepted.

My main concern is the altered W-2 forms, but it sounds like it's okay. For my 2021 return, the California FTB website shows this altered W-2 form as part of the return. I imagine 2022 will show the same. Also, it sounds like California 540 Line 12 should NOT include nontaxable IHSS payments that weren't in W-2 Box 16, but it's okay if it did.

[CatinaT1]

Correct. You ultimately did not receive or exclude anything you shouldn't have. You will be okay. The IRS and State both get copies of your W-2. They will see how you reported it, and all will be okay!

Good job completing your takes and handling a confusing tax situation!