Medicaid Waiver Payments and W2 Box 1 blank but not box 3,4,5 and 6

[megank1]

I am working for IHSS and I received Medicaid Waiver Payments. My W2 box 1 is blank but not box 3,4,5 and 6. According to 1040 line 1d instruction, "If you received nontaxable Medicaid waiver payments, and box 1 of your Form(s) W-2 is blank or has zeros, and you are choosing not to include nontaxable payments in earned income for purposes of claiming a credit, do not attach any of these Form(s) W-2 to your return."

I  don't want to include my Medicaid Waiver Payments in earned income for the purposes of claiming a credit. The 1040 instruction says I don't need to attach my W2 if box 1 is blank. However, there is a dollar amount in box 3,4,5 and 6. Does IRS need those boxes amount from my W2? Do I still need to attach my W2?

[CatinaT1]

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.   

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. 

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