IHSS income and IRA'S

[055969]

My wife no longer has a job due to Covid since 2020 and has no earned income other then the nontaxable IHSS from California. We have not been reporting this for many years as she is a live in provider for our daughter.  I am retired and collecting a pension plus SSA both of which are not concidered Earned Income. She is only 58 and has an IRA that we are putting money into each year.  This year TurboTax tells us that YOUR IRA CONTRIBUTION ISN'T PERMITTED, because our earened income is zero. We no longer get any W-2's or 1099 on the money she makes from IHSS.  So my question is, How do we report IHSS as earned income so to avoid a 6% penalty each year that the money remains in the IRA account?

[MaryK4 · Accepted solution]

The SECURE Act allows In-Home Supportive Services (IHSS) workers to treat excludable difficulty-of-care payments as earned income for purposes of calculating the worker's IRA or defined contribution plans contribution limits, applicable for defined contribution plans to plan years beginning after December 31, 2015, and with respect to IRAs, to contributions after December 20, 2019  IRC §§408(o), 415(c)(3); SECURE Act §116

 Entering into TurboTax is a bit confusing so please follow these steps carefully. 

1.  Sign into TurboTax and continue through until you can start selecting "Wages & Income" located at the top of the screen
2.  Click on Wages & Income
3. (If the program asks about your W2, select Skip for now )
4. Select answers to the following questions if necessary to move forward 
5. Click Add more income 
6. Scroll down to the VERY LAST option "Less Common Income" and click Show more
7. On this new drop-down list scroll down to the VERY LAST option "Miscellaneous Income" and click START 
8. On this new drop-down list scroll to the VERY FIRST option "Other income not already reported on a Form W-2 or Form 1099. Click START
9. Select YES to the page titled "Other Wages Received" and Continue
10. Select CONTINUE on the "Wages earned as a Household Employee" screen (enter nothing here)
11. Select CONTINUE on the "Sick or Disability Pay" screen (enter nothing here)
12. Select "Yes" on the "Any Other Earned Income" screen and continue
13. Select "Other" on the "Enter Source of Other Earned Income" and Continue
14. In Description Box type "Notice 2014-7" and the amount (NOTE- YOU MUST ENTER ALL THE INCOME OR NONE)
15. Click Done 

This will put the income on your 1040 line 1 where it needs to be. 

Now you need to make an entry so that TurboTax will make the income exempt from tax. 

Go back to the Wages & Income section  (you will be repeating some steps, but not all)

 Scroll down to the VERY LAST option "Less Common Income" and click Show more

1. On this new drop-down list scroll down to the VERY LAST option "Miscellaneous Income" and click REVISIT
2. Now scroll down to the VERY LAST option "Other reportable income" and click Start

3. Type "Notice 2014-7" and the same amount you entered before but as a NEGATIVE (put - in front of the number) 

    

   This NEGATIVE number should show on your 1040 line 8 

Go through the return and answer any questions regarding the IRA contribution.

[055969]

Thanks MaryK,

   On your answer in number 14 you say "In Description Box type "Notice 2014-7" and the amount"  does the amount go in that box or under the name of the person reciveing the income? It has Description and then our names with boxs under them. I think it goes there just checking bbefore I do it. 

[ColeenD3]

Below is the screen Mary is referring to in Step 14.

[055969]

Thanks for the info. As we are filing jointly both of our names are there. the only problem now is that we added her Income we no longer get the EITC.....so my return went from 1200 to 161. But at least we can still add to her ira with out adding a 6% penalty each year the money sits in the account.

[MaryK4]

Did you go back through the EIC section?  Did you have any other income?  Because the entries added the income then subtracted so it should not have affected your EIC (The Earned Income Tax Credit was the exact reason the steps were created.)  @055969

[055969]

Yes I did, the only other income is from SSA and my retirement so they are not earned income. thats why we were getting back 1200 at first. When we got to the IRA section and since we did not show any erned income it was a penlty and dropped my return to just over 800. My wife gets the max IHSS for our daughter, its a little over 60k a year so that was used by turbo tax to show earned income. That may be more then alot of people earn with IHSS. So it put us over the limit for the EIC. If it was not for Covid we would be fine she would still be woking at the church preschool and we would not have had this problem. And no she did not collect unemployment benefits as churchs are excempt in paying into the system.

[Artel]

Very helpful info.  Will use your TurboTax instructions for my 2023 returns.  Difficulty-of-Care payments are tax exempt.  So, would the related IRA Contributions be treated as a deductible contribution (funded with pre-tax dollars) or a non-deductible contribution (funded with after-tax dollars)?  Thank you.