Qualified Medicaid Waiver payments on a W-2 show as earned income for EIC
Certain Medicaid waiver payments are treated as difficulty-of-care payments when received by an individual care provider for care of an eligible individual (whether related or unrelated) living in their home.
Medicaid Waiver Payments for In-Home support services are excludable from gross income and should not be included in your earned income.
If these payments are paid to you in box 1 of form W-2 (they should not), first try to get a corrected Form W-2 from the payer. If you cannot get a corrected Form W-2, follow one one of these two steps:
- Exclude these payments from your return:
Do not include this W-2 in your return. The IRS may contact you to explain why the payments were not included on your tax return.
You can explain that the payments are excludable from gross income under Notice 2014-7 as payments for In-Home support services.
- Do not enter the W2 in the Wages & Salaries topic.
Instead, to enter these payments:
- In the Wages & Income section, go to the Less Common Income section and select Start next to Miscellaneous Income, 1099-A, 1099-C
- On the next screen, select Start next to Other Reportable Income and answer Yes on the next screen
- You will now make two entries on the Other Taxable Income screen:
- Your first entry description would be W-2 EIN # (enter EIN number from W-2) Box 1 Medicaid Waiver Payments, and enter the Box 1 amount as a positive number.
- Next click "Add Another Miscellaneous Income Item," and enter this description: IRS Notice 2014-7 excludable income and enter the W-2 Box 1 amount as a Negative (-) number.
This both shows and explains removing the W-2 income, placing a zero on Line 21 of your Form 1040.
If your W-2 has federal or state taxes withheld, you can enter these amounts as follows:
- In the Deductions & Credits section, go to the Estimates and Other Taxes Paid section.
- Select Start next to Other Income Taxes, and answer Yes on the next screen if necessary
- On the Other income taxes screen, go to the Other Income Taxes Paid in 2016 section.
- Select Start next to Withholding not already entered on a W-2 or 1099, and enter the amount on the next screen.
For more information, refer to IRS Notice 2014–7, 20144 I.R.B. 445.