Medicaid Waiver and W2 Entry

[BarbaraLindsey]

My W2 has amount in Box 1 and no code or amount in box 12 (because this Medicaid waiver is new to our agency this year-next year's w-2 will be set up correct).  Agency will not issue a 2025 corrected W2.  How do I properly exempt the box 1 amount as nontaxable Medicaid waiver (IRS Rule 2014-7).  I've tried various ways and have seen it double my taxable income; also seen it not transfer to my Mass. state tax return.  Can somebody give simple instructions.  TurboTax should have been on this simple fix. 

[ThomasM125]

If the amount reported in box 1 is not taxable, then you need to enter it as reported in box 1 when you enter your W-2 form in TurboTax. Then, you will enter a negative amount equal to the non-taxable amount reported in box 1 of your W-2 form as "Other Income", along with a note referencing "Notice 2014-7." The two amounts will cancel each other out so the net amount taxable will be zero.

You can make that adjusting entry in TurboTax as follows:

1. From the Federal menu in TurboTax find Wages and Income 

2. Find Less Common Income

3. Choose Miscellaneous Income, 1099-A, 1099-C

4. Choose Other Reportable Income

5. Enter a description of the adjustment and the amount as a negative number

[BarbaraLindsey]

So I understand I should just enter the W2 amounts as indicated on the W2 but then where in the software do I enter "other Income" as a negative number?  Will that transfer over to the state tax program as well? If you know. Thanks

[ThomasM125]

Yes, the adjustment will transfer to the state return.

You can make that adjusting entry in TurboTax as follows:

1. From the Federal menu in TurboTax find Wages and Income 

2. Find Less Common Income

3. Choose Miscellaneous Income, 1099-A, 1099-C

4. Choose Other Reportable Income

5. Enter a description of the adjustment and the amount as a negative number

[BarbaraLindsey]

Hi, I made all the entries as explained in the form 1099-MISC entry, but found that the box 1 exemption amount did not flow through to the Mass. State Return.  I am wondering if I should just enter all the amounts on the W2 as is, then use the check box on the following screen for Medicaid Waiver might do the trick.  Any thoughts?

[MonikaK1]

Yes, you can also enter the W-2 as is and then check the box in the next screen identifying the W-2 as "Nontaxable Medicaid Waiver Payments that qualify as difficulty of care payments".

The steps that @ThomasM125 provided, entering Box 1 in the W-2 and then entering a negative number in Other Reportable Income, have worked for other users. We have suggested several different solutions to this issue because different W-2s in different states or from different agencies tend to report the Medicaid Waiver income differently.

Please also see this help article for information on how to account for IHSS/ Medicaid Waiver wages on your tax return depending on whether you received a W-2 and what information you were provided. The article was just updated on January 26, 2026.

@BarbaraLindsey