IRS Notice 2014-7 — Difficulty-of-Care Income Exclusion

IRS guidance (still current as of 2026) allowing family caregivers who receive wages under a Medicaid HCBS waiver (§1915(c)) for care provided to someone living in the caregiver's home to exclude those wages from federal gross income. Directly increases the take-home value of paid family caregiver arrangements across every state consumer-directed and self-directed Medicaid program. Per IRS FAQs and Feigh v. Commissioner, excluded wages may still count as earned income for EITC and ACTC purposes where that is beneficial.

Under IRS Notice 2014-7 (IRC §131 framework), wages received by a family caregiver for Medicaid HCBS waiver (§1915(c)) services provided to a care recipient living in the caregiver's home are excludable from federal gross income. Practical impact: (1) A family member paid as a caregiver through a consumer-directed or self-directed Medicaid program (any of the ~260+ state HCBS waivers) who lives with the care recipient does not owe federal income tax on those wages; (2) No Social Security or Medicare (FICA) taxes are owed on excluded wages by the FMS/fiscal employer agent; (3) Despite the exclusion, per Feigh v. Commissioner (2019) and IRS FAQs, a taxpayer may choose to treat these excluded wages as earned income for purposes of the Earned Income Tax Credit (EITC) and Additional Child Tax Credit (ACTC) — this is beneficial when EITC eligibility would otherwise be lost; (4) The exclusion applies per the 'difficulty of care' provision of IRC §131, which covers foster care provider payments for care in the provider's home. File by omitting these wages from gross income on Form 1040; if needed, note the exclusion per IRS Notice 2014-7. This benefit applies to millions of family caregivers receiving Medicaid HCBS wages in self-direction programs.

Some details for this program are still being verified. Check the official source for the most current information.

Services

Under IRS Notice 2014-7 (IRC §131 framework), wages received by a family caregiver for Medicaid HCBS waiver (§1915(c)) services provided to a care recipient living in the caregiver's home are excludable from federal gross income. Practical impact: (1) A family member paid as a caregiver through a consumer-directed or self-directed Medicaid program (any of the ~260+ state HCBS waivers) who lives with the care recipient does not owe federal income tax on those wages; (2) No Social Security or Medicare (FICA) taxes are owed on excluded wages by the FMS/fiscal employer agent; (3) Despite the exclusion, per Feigh v. Commissioner (2019) and IRS FAQs, a taxpayer may choose to treat these excluded wages as earned income for purposes of the Earned Income Tax Credit (EITC) and Additional Child Tax Credit (ACTC) — this is beneficial when EITC eligibility would otherwise be lost; (4) The exclusion applies per the 'difficulty of care' provision of IRC §131, which covers foster care provider payments for care in the provider's home. File by omitting these wages from gross income on Form 1040; if needed, note the exclusion per IRS Notice 2014-7. This benefit applies to millions of family caregivers receiving Medicaid HCBS wages in self-direction programs.

How to apply

Apply online or find more information at the official program page.