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

IRS guidance allowing individual care providers to exclude certain Medicaid Home and Community-Based Services waiver payments from federal gross income when the payments are for care of an eligible individual under a state Medicaid HCBS waiver program described in Social Security Act section 1915(c), and the care is provided in the individual care provider home where the care recipient also lives. The exclusion can materially increase take-home value for live-in paid family caregivers, but employment-tax treatment and state FMS reporting practices can vary.

IRS Notice 2014-7 treats certain payments to individual care providers under a state Medicaid HCBS waiver program described in Social Security Act section 1915(c) as difficulty-of-care payments excludable from federal gross income under IRC section 131 when the care is provided in the care provider home and the care recipient also lives there under the plan of care. The exclusion can apply to more than one care provider in the shared home. It does not apply when the provider has a separate home and only works or sleeps in the care recipient home, or to respite care where the care recipient does not live in the provider home. IRS Q&A says taxpayers may choose to include otherwise excludable payments in earned income for EITC or ACTC if beneficial. For W-2 reporting, IRS says nontaxable Medicaid waiver payments may be reported in box 12 with Code II. Do not treat this as a blanket FICA exclusion: IRS says Social Security and Medicare tax treatment depends on whether the caregiver is employed by an agency, by the care recipient, or is an independent contractor.

Services

IRS Notice 2014-7 treats certain payments to individual care providers under a state Medicaid HCBS waiver program described in Social Security Act section 1915(c) as difficulty-of-care payments excludable from federal gross income under IRC section 131 when the care is provided in the care provider home and the care recipient also lives there under the plan of care. The exclusion can apply to more than one care provider in the shared home. It does not apply when the provider has a separate home and only works or sleeps in the care recipient home, or to respite care where the care recipient does not live in the provider home. IRS Q&A says taxpayers may choose to include otherwise excludable payments in earned income for EITC or ACTC if beneficial. For W-2 reporting, IRS says nontaxable Medicaid waiver payments may be reported in box 12 with Code II. Do not treat this as a blanket FICA exclusion: IRS says Social Security and Medicare tax treatment depends on whether the caregiver is employed by an agency, by the care recipient, or is an independent contractor.

How to apply

Use the official program page for application details: official program page.