Starting in 2014, certain payments that a taxpayer receives from certain state agencies, the foster care system, or Medicaid for caring for someone living in their home under a state's Medicaid waiver program may be excluded from the taxpayer's income as provided in Notice 2014-7. These Medicaid waiver payments may be excluded from the taxpayer's income whether or not the taxpayer is related to the eligible individual receiving the care.
Such payments may be reported to the taxpayer on Form 1099-MISC or Form W-2 depending upon the issuing state agency. How they are entered in the return will vary depending on the form:
- If the payment is reported to the taxpayer on Form W-2, the amount reported in Box 1 of the W-2 is reported on Line 1 of the 1040 as part of the taxpayer's "Wages, salaries, tips, etc.", and then the non-taxable amount is subtracted as "Other Income" on Schedule 1 notated "Notice 2014-7".
- If the payment is reported to the taxpayer on Form 1099-MISC, the taxpayer must report the income on Schedule C if providing home health care is their business. Otherwise, they can report the payment and exclusion on either Schedule 1, with both the payment and the exclusion under Other Income, or on Schedule C, with the payment in Gross Receipts and the excludable amount in "Other expense" notated “Notice 2014-7”.
If the taxpayer is not in the business of providing home health care, regardless of how the Medicaid Waiver Payments are reported they are ultimately excludable from income. They are not self-employment income and thus are not subject to self-employment tax, however as a result of the tax court ruling in Feigh v. Commissioner in 2019, Medicaid waiver payments may be considered earned income for the purposes of the Earned Income Credit and the Additional Child Tax Credit. See IRB 2020-14 for more information.
Note: If the W-2 does not include an amount in Box 1, enter the amount in Box 1 anyway using the procedure below.
Form W-2
To enter Medicaid waiver payments reported on Form W-2 in TaxSlayer ProWeb, from the Federal Section of the tax return (Form 1040) select:
- Income
- W-2 - Select + Add a W-2 Wage Statement
- Enter the W-2 just as it is. Note: If Box 1 is blank, enter the Medicaid Waiver Payment in Box 1 anyway.
- On Line 14, click this check box:
Do you want to include Medicaid Waiver payments in the calculation of earned income?
- Enter the Box 1 amount in the "Medicaid Waiver Payment" field.
Indicating the payment as above creates the subtraction in Schedule 1 notated "Notice 2014-7". Additionally, the Medicaid waiver payment will be included in the calculation of the taxpayer's earned income for Earned Income Tax Credit and any Additional Child Tax Credit purposes.
Form 1099-MISC
In TaxSlayer ProWeb, where you enter the Medicaid waiver payments depends on whether or not the taxpayer is in the business of providing home health care services.
If the taxpayer's business is providing home health care services, enter Medicaid waiver payments directly in Schedule C. From the Federal Section of the tax return (Form 1040) select:
- Income
- Profit or Loss From Business
- Enter the Box 3 amount as Gross Receipts
If the taxpayer's business is not providing home health care services, they can enter the Medicaid waiver payments in either Schedule C or as Other Income in Schedule 1.
If entering on Schedule 1, from the Federal Section of the tax return (Form 1040) select:
- Income
- 1099-MISC
- Enter the Payer and Recipient information
- Enter the Box 3 amount
- After Box 14, click this check box:
Do you want to include Medicaid Waiver payments in the calculation of earned income?
- Enter the amount in the "Medicaid Waiver Payment" field.
If entering on Schedule C, report as above for a taxpayer whose business is providing home health care, with the Box 3 amount in Gross Receipts, but also include the same amount under Other Expenses notated "Notice 2014-7".
Note: This is a guide on entering Medicaid Waiver Payments into TaxSlayer ProWeb. This is not intended as tax advice.
Additional Information:
IRS: Instructions for Form 1040