May 14, 2024

Unlocking Financial Relief: How Medicaid Waiver Payments Offer Tax Benefits and Tax Free Income

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Article Highlights:

What are Medicaid Waiver Payments?
The Taxability of Medicaid Waiver Payments
Earned Income Tax Credit (EITC) and Medicaid Waiver Payments

Medicaid waiver payments have become a significant aspect of the healthcare and tax landscape in the United States, especially for individuals and families providing care to those who would otherwise require institutionalized services. This article delves into the intricacies of Medicaid waiver payments, exploring their definition, tax implications, their relationship with the Earned Income Tax Credit (EITC), and the correct method of reporting these payments on tax returns.

What are Medicaid Waiver Payments? - Medicaid waiver payments are funds provided to caregivers of individuals with disabilities, chronic illnesses, or who are aging, allowing the individual to receive care in a home or community-based setting rather than in an institutional or nursing home environment. These payments are part of Medicaid's Home and Community-Based Services (HCBS) waivers, which states can apply for to tailor services to meet the needs of specific populations.

The Taxability of Medicaid Waiver Payments - In 2014, the IRS issued Notice 2014-7, which significantly impacted the tax treatment of Medicaid waiver payments. According to this notice, Medicaid waiver payments that meet certain requirements are excludable from the caregiver’s gross income. This exclusion applies regardless of whether the caregiver and the care recipient are related, marking a pivotal change in how these payments are treated for tax purposes.

For the favorable tax treatment to apply, the care provider and the person receiving the care must have the same home, which can be either the care provider’s home or the home of the individual being cared for. The care provider's home means the place where the provider resides and regularly performs the routines of the provider's private life, such as shared meals and holidays with family. Further, the number of qualified individuals being cared for cannot be more than 10, if the qualified individuals are age 18 and under, OR not more than 5 if the number of qualified individuals is age 19 or over.

Earned Income Tax Credit (EITC) and Medicaid Waiver Payments - The EITC is a refundable tax credit for low- to moderate-income working individuals and families, particularly those with children. The amount of EITC benefit depends on the recipient's income, marital status, and number of children. The taxability of Medicaid waiver payments intersects with the EITC in a unique way. While these payments are excludable from gross income, they can still be considered as earned income for the purposes of calculating the EITC, thanks to the precedent set by the Tax Court in the Feigh case. This case highlighted that the IRS's Notice 2014-7 could not reclassify Medicaid waiver payments in a way that would remove a statutory tax benefit, such as the EITC.

The Taxpayer Advocate Service (TAS) provides guidance on how to report qualified non-taxable Medicaid waiver payments as earned income for the EITC and Additional Child Tax Credit (ACTC) purposes on a tax return while excluding the income from taxation. According to TAS, taxpayers should treat the Medicaid waiver payment received as wages if they choose to include it as earned income for EITC or ACTC purposes, even if a Form W-2 was not received for these payments. Then back out the same amount as an adjustment to income on Schedule 1 with the notation "Notice 2014-7".

Medicaid waiver payments play a crucial role in supporting caregivers and ensuring that individuals requiring care can receive it in a home-based setting. The tax treatment of these payments, particularly their exclusion from gross income and their eligibility for consideration as earned income for EITC purposes, provides financial relief and support to caregivers. Properly understanding and reporting these payments on tax returns is essential for maximizing tax benefits and ensuring compliance with IRS guidelines.

If you have received Medicaid waiver payments and have not excluded the income on the return for the year(s) you received the payments, contact this office so your return or returns can be amended for a refund and possibly also claim the EITC.