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Medicaid waiver payments – what are they and how do individuals report?By: National Association of Tax Professionals
April 26, 2021

As practitioners, we receive many tax forms from our clients. Some of these forms we are very familiar with – Forms W-2, 1099-MISC, 1099-NEC to name a few. Many of us know what a correctly completed Form W-2, Wage and Tax Statement, should look like. If a client were to present the following hypothetical W-2 to you, would you think there is an error on the form?

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Some of you may be thinking, yes there is an error because there are no federal wages or federal withholding. However, if the payments received by Riley are considered Medicaid waiver payments, the W-2 is prepared correctly and there would be no federal wages or federal withholding.

Many of us have never heard of Medicaid wavier payments and only become aware of the term when a client presents a W-2 similar to the one above. We will provide a high-level discussion of Medicaid waiver payments later in this blog, but for now, we will focus on the W-2.

The IRS provides questions and answers on Medicaid waiver payments. Per question 17, any amount an agency pays to an employee that is excludable from gross income shouldn’t be included in Box 1 (Wages, Tips, Other Compensation) of the employee’s Form W-2. If the entire amount the agency pays to the employee during the year is excludable from their gross income, Box 1 of Form W-2 should be left blank.

Payments made to employees generally are wages for Social Security and Medicare (FICA) tax purposes, even if the payments are excludable from gross income for income tax purposes. So, generally, the agency should withhold and pay FICA tax, and report the FICA wages and taxes withheld on the employee’s Form W-2 (Q 18).

What is a qualified Medicaid waiver payment?

Qualified Medicaid waiver payments are payments made by a state or political subdivision thereof, or an entity that is a certified Medicaid provider, under a Medicaid wavier program to an individual care provider for nonmedical support services provided under a plan of care to an eligible individual (related or unrelated) living in the individual care provider’s home.

Difficulty of care payments are payments representing compensation to a foster care provider for the additional care required because the qualified foster individual has a physical, mental or emotional handicap. The provider must provide the care in the provider’s foster family home, a state must determine the need for this compensation and the payor must designate the compensation for this purpose.

As of Jan. 3, 2014, the IRS announced it will treat qualified Medicaid waiver payments as excludable difficulty of care payments, regardless of whether the care provider is related to the eligible individual.

Notice 2014-7 addresses the exclusion from income for Medicaid waiver payments. The notice does not change the treatment of the payments as earned income for tax credit purposes. These payments remain earned income for purposes of the earned income credit and the additional child tax credit.

Feigh vs. Commissioner

Feigh v. Commissioner concluded that Medicaid waiver payments were earned income. This means, in the context of a W-2 person and the earned income credit (EIC), earned income is compensation received as an employee (for example wages), but only if the amount is included in gross income for the tax year. Medicaid waiver payments that may be excluded from income under Notice 2014-7 may still be treated as earned income for purposes of the EIC. A discussion of Feigh vs. Commissioner and earlier treatment of Medicaid waiver payments can be found in the TAXPRO Monthly, Issue 9, Volume 41, September 2019 issue.

As a side note, for 2020, the EIC is claimed on Line 27 of Form 1040. Schedule EIC must be filed if the taxpayer has a qualifying child. Worksheets are provided by the IRS and in most cases by your software.

Non-deductible IRA contributions

An issue many foster care providers have experienced prior to COVID is the inability to contribute to an IRA. The payments received were not considered taxable income and therefore the taxpayer was not eligible to make an IRA contribution unless they had compensation from other sources. The Setting Every Community Up for Retirement Enhancement (SECURE) Act changed that.

Under the SECURE Act, difficulty of care payments may increase the amount of nondeductible IRA contributions, but not above the annual statutory limit.

Tax return presentation

Many of you are wondering how all of this gets presented on the taxpayer’s tax return. Here’s an example to help illustrate:

Riley Watson, age 26, is a single mom receiving $20,300 in Medicaid waiver payments in 2020 to care for her disabled son Caden. Caden is 5 years old, and the payments are Riley’s only source of income. Her W-2 was prepared as presented above.

Per the Form 1040 instructions, Line 1 includes “any Medicaid waiver payments you received that you choose to include in earned income for purposes of claiming a credit or other tax benefit, even if you didn’t receive a Form W-2 reporting these payments.”

Schedule 1, Line 8 instructions, tell us to:

  1. Include on Line 1 any Medicaid waiver payments you received that you choose to include in earned income for purposes of claiming a credit or other tax benefit, even if you did not receive a Form W-2 reporting these payments.
  2. On Line 8, subtract the nontaxable amount of the payments from any income on Line 8 and enter the result. If the result is less than zero, enter it in parentheses. Enter “Notice 2014-7” and the nontaxable amount on the dotted line next to Line 8.

The instructions are similar to what the IRS is saying in Q 9. Taxpayers who receive payments described in Notice 2014-7 that are treated as difficulty of care payments can choose to include the payments in earned income for purposes of the earned income credit (EIC) or additional child tax credit (ACTC). This Q and A was updated May 8, 2020, and indicates, while earned income for EIC or ACTC, the payments are not taxable for federal income tax.

Example:

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In this scenario, Riley included as wages on Line 1 the non-taxable income, backed it out on Schedule 1, Line 8. Despite having no taxable income or tax liability, she is eligible for a $3,425 EIC and $1,400 additional child tax credit. The EIC amount can be calculated by using the EIC table provided in the instructions. Schedule 8812, Additional Child Tax Credit, would be used to calculate the ACTC.

Riley could also contribute to a nondeductible IRA if she wanted to.

The American Rescue Plan Act of 2021 (ARP) signed on March 11, 2021, made changes to the child tax credit (CTC). As we see in the above example, under the CTC in effect for tax year 2020, only up to $1,400 of the CTC was refundable (and this could only be obtained if the taxpayer has earned income of at least $2,500).

Some have seen this as burdensome for lower-income individuals who most likely need the CTC benefit the most. Under the ARP Act, changes have been made to the CTC for 2021. For tax year 2021, the credit is fully refundable (the $1,400 refundable limit has been removed) and the $2,500 earned income requirement has been eliminated.

To learn more about the tax impacts of having a child, you can attend NATP’s self-study – free for Premium level members!

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Claiming payroll credits – employee retention and paid leaveBy: National Association of Tax Professionals
April 20, 2021

Business owners, whether it’s your own tax firm or your clients’ businesses, can take advantage of some tax credits and other benefits to help offset the financial impacts of COVID-19.

Some beneficial programs were put in place since the arrival of COVID-19, including the Paycheck Protection Program, the employee retention credit, paid sick and family leave, the Consolidated Appropriations Act, 2021, the Coronavirus Aid, Relief and Economic Security (CARES) Act and the American Rescue Plan Act.

In order to apply these credits and benefits to your clients’ returns though, you need to know how they work.

“It’s difficult to find someone whose life hasn’t been impacted by COVID,” said Steve O’Rourke, EA, founder and president of O’Rourke Tax Service, Inc. “These credits and other programs can be extremely beneficial to just about anyone.”

O’Rourke is teaching a webinar called Claiming Payroll Credits for Employee Retention and Paid Leave, which will cover credits tax pros and their business clients can take advantage of, whether or not they have employees. Over the past few months, revisions were made by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act) and the American Rescue Plan Act of 2021 (ARP Act ), including amending and extending the employee retention credit and the availability of certain advance payments of tax credits. For example, originally the employee retention credit was only available to those who did not have a Paycheck Protection Program loan. This rule was recently revised.

O’Rourke will go over all these programs, changes to the credits and more in the upcoming webinar. It will also cover the differences between 2020 and 2021. He said it will be a hands-on course with plenty of examples and will show, step-by-step, how to complete Form 941.

“All I want people to realize is that it’s such an important topic,” O’Rourke said. “Even though you may not know much about any of these programs, they affect a lot more people than you’d think and you won’t be alone.”

This webinar is included with Premium level NATP membership. Professional level members can use code FREECPE at checkout to redeem a free 2 CPE credit. If you can’t make the live broadcast, it will also be offered on-demand.

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You make the callBy: NATP Research
April 15, 2021

Question: Michael is a college student, supported by his parents, and claimed as a dependent in the previous tax years. Assuming he can still be claimed as a dependent this year, regarding the stimulus payments and the recovery rebate credit, can Michael file a tax return to claim this credit?

Answer: No. To claim the recovery rebate credit (RRC), an “eligible individual” is any individual other than a nonresident alien or an individual who is a dependent of another taxpayer for the tax year. A dependent of the taxpayer, as defined for purposes of the dependency exemption by §152(c), includes a qualifying child and a qualifying relative.

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Extended payments and return due dates; estimated payments still due April 15By: National Association of Tax Professionals
April 9, 2021

This year has been a year of updated information and the guidance related to the 2020 return due date is no exception!

In mid-February 2021, NATP submitted a letter to IRS Commissioner Charles Rettig requesting his consideration of a filing extension to the 2021 tax season. In mid-March, the IRS announced an extension of the filing deadline, but not the first quarter estimated payment deadline. In early April, the IRS extended additional tax deadlines to May 17.

The Treasury Department and the IRS announced on March 17, 2021, that the federal income tax filing and payment due dates for individuals for the 2020 tax year is automatically extended to May 17, 2021 (from April 15, 2021). This postponement applies to individual taxpayers, including individuals who pay self-employment tax. Penalties, interest, and additions to tax will begin to accrue on any remaining unpaid balances as of May 17, 2021. This relief does not apply to estimated tax payments that are due on April 15, 2021. These payments are still due on April 15.

Additionally, earlier this year, the IRS announced relief for victims of the February winter storms in Texas, Oklahoma and Louisiana. These states have until June 15, 2021, to file various individual and business tax returns, and make tax payments. This extension to May 17 does not affect the June deadline.

On April 7, 2021 the IRS announced other tax deadline extensions to May 17, 2021.

Keep in mind, states do not always comply with federal updates and may issue separate guidance. It would appear Hawaii is the only state (with an income tax) that has not delayed the return deadline. The recommendation would be to verify state filing information to ensure state compliance requirements are met.

Notice 2021-21 (released March 29, 2021) clarifies the extended due dates. A summary is provided below:

Item Extended to
Form 1040 series (this applies to filing the schedules, returns and other forms that are filed as attachments to the Form 1040 series or must be filed by the due date of the Form 1040 series (i.e. Schedule H, Schedule SE, Form 8915-E, etc.) May 17, 2021
Elections required to be made on a timely-filed Form 1040 series or attachment as long as they are filed on the form or attachment On or before May 17, 2021
2020 contributions to Individual retirement arrangements (IRAs and Roth IRAs) May 17, 2021
2020 contributions to health savings accounts (HSAs) May 17, 2021
2020 contributions to Archer Medical Savings Accounts (Archer MSAs) May 17, 2021
Coverdell education savings accounts (Coverdell ESAs) May 17, 2021
Furnish and file Form 5498 series (applicable to financial institutions) June 30, 2021
Report and pay the 10% additional tax on 2020 distributions from IRAs or workplace-based retirement plans May 17, 2021
Claims for credits or refunds on Forms 1040 or 1040-X if the three-year period of limitations for filing such claims expires on or after April 15, 2021, and before May 17, 2021 May 17, 2021
Forms filed by individual or non-individual taxpayers who are filing forms outside the Form 1040 series (i.e. Form 709 (gift tax return) April 15, 2021
2021 estimated income tax payment due April 15, 2021 April 15, 2021

As you can see, the relief is limited in scope when compared to the calendar year 2020 extension relief provided for by the IRS. If you remember a year ago, the 2019 income tax filing and payment deadlines for all taxpayers who file and pay their federal income taxes on April 15, 2020, was automatically extended until July 15, 2020. For 2019 returns, this relief applied to all individual returns, trusts, and corporations.

What does this mean for practitioners?

It means some returns have not been automatically extended. For example, the filing date for gift tax returns and the payment of gift tax has not been extended. If you have clients who will not be able to file a 2020 gift tax return by April 15, 2021, an income tax return extension request (Form 4868) or a separately filed gift tax return extension request (Form 8992) will need to be filed by April 15, 2021.

Also, there is no relief for the first installment of estimated tax. The payment of any income tax that might be due for 2020 is now due May 17, 2021, but the first installment of estimated tax for 2021 is still due April 15, 2021.

Some of you may be already thinking of extensions and a workaround for the first 2021 estimated tax payment. Many of our clients may be struggling and will not be able to make a first quarter estimated payment and practitioners are in the habit of applying an extension overpayment to the following years first quarters estimated tax payment.

For example, in pre-COVID years if we were extending taxpayer Tim’s tax return (2017) and it is estimated he owed $20,000 with his return, and had a $10,000 first quarter estimated payment (2018) due, we might have him pay $35,000 with the extension payment (2017) ($20,000 for the 2017 return, $10,000 first quarter 2018 estimate, and $5,000 rounding just in case we made a calculation error).

Pre-COVID, the filing extension and first quarter extension payment were due the same date – generally April 15. When we eventually file the 2017 return and there is an overpayment, the overpayment would be applied to the first quarter 2018 estimate.

Will practitioners be able apply to apply this strategy for 2020 with 2021 estimates?

If we file a 2020 extension for 2020 in May 2021, and make an extension overpayment payment, can we expect that overpayment to be applied to the first quarter 2021 estimated payment? The IRS has not issued any guidance on the subject specifically for the current year; however, it would appear this would not be allowed based on Rev. Rul. 84-58.

According to the Rev. Rul “For returns filed after Dec. 31, 1983, the Service will apply overpayments arising on or before the due date of a return against the first installment payment of the next year’s estimated tax, unless the taxpayer notifies the Service that the overpayment should be applied against another installment.”

The 2020 return is due May 17, 2021 and the first quarter estimate is due April 15, 2021. It would seem an overpayment from a return due in May would not be able to be applied to an installment due in April.

Finally, the extension relief the IRS granted only applies to individual filers and those businesses required to file the Form 5498 series. There has been no filing deadline extension for business entities, trusts and estates. We have not received any indication that an extension of the payment and filing deadlines for these entities will be extended for 2020.

The IRS may not have granted all the extended time frames one had hoped for. Hopefully the extended deadlines have helped some. Granted, the fact that the first quarter 2021 estimated payment due date has not been extended will impact some small businesses and their owners who are still dealing with the effects of the pandemic. With the April 15, 2021 deadline sneaking up, it remains to be seen if the IRS will extend the first quarter estimated payment date.

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Guiding clients through COVID timesBy: Allison Einbinder, EA
March 30, 2021

As tax professionals, we focus on numbers, tax laws and analysis. We don’t often consider the emotions our clients experience and the impact that brings to our work.

COVID times have presented challenges for everyone that we experience in unique ways. The first lockdowns, closures and restrictions started last year, during the height of tax season. We were faced with a pandemic that forced rapid change. Many of us cancelled in-person meetings, started exchanging documents electronically and found creative ways to physically distance while performing our jobs. Some of us were lucky to have tech-savvy clients for whom these changes were not cumbersome. Other clients had no experience working virtually and the struggle was real.

One of the best value-added services we can bring to this tax season is supportive empathetic guidance. We can take a short-term therapeutic approach to working with clients. This isn’t to say we must coddle our clients or play therapist. We are not trained in the intricacies of therapy and mental health. But we can lead by example, offer suggestions, model calm confidence and hope for the future.

Remember the client’s perspective

Our clients, and humans everywhere, have been stressed to the limit. We fight to maintain or find sources of income and simply function on a basic level, on top of caring for family and friends, worrying about staying healthy, figuring out ways to live gratifying and enriching lives, all in ways modified to ensure safety.

We become laser focused on how we function professionally. We can become so deep in number crunching that we forget the benefits of working with clients in a therapeutic way. Being empathetic, sensitive and assuaging guilt can lift burdens experienced around taxes and finances.

Tax preparation is challenging and difficult for most clients. Others breeze through the process with ease. No matter which type of client you are working with, remind them they are not alone. In a global pandemic we must support and encourage each other. Use your professionalism and experience to help clients lighten their load.

Be a friendly supportive person for clients to rely on, guiding them through the complexities of ever-changing tax code and numerous due dates. Reiterate that their focus should be on keeping healthy, reducing stress and ensuring their subsistence.

Many clients are experiencing isolation, depression and despair. Help them maintain perspective and forward focus. It does no good to beat ourselves up over past shortcomings — 2020 was an anomaly we are unlikely to experience again in our lifetimes. Remembering this too shall pass and embracing the nature of impermanence alleviates daily burden.

While it will take a while to get back to a new sense of normal, we can use this year to position our clients, our businesses and ourselves for seasons of growth and renewal.

How we can be impactful and helpful

Assure your clients nothing is more important than their health. Without wellness, we cannot earn, care for our loved ones and support other businesses.

The impact of COVID times on our lives can be paralyzing. Avoid additional stressors and remember that simple tasks can be overwhelming. The world is still progressing at reduced capacity as the IRS and other taxing authorities are underfunded and understaffed. The saying “patience is a virtue” has never been truer.

Accounting and consulting services are in demand. Remind clients of the services you offer beyond tax preparation. Maintaining books, organizing receipts and notes, and tracking income can fall to the bottom of our clients’ priority lists. Focusing on healthy record-keeping habits can give clients a sense of control in chaotic times, even if they outsource the task.

Stay networked with other professionals and support their businesses. If clients are overwhelmed and we don’t offer services that would provide relief, refer them to our colleagues.

Remain informed. Our clients rely on us to monitor changes they may not have the bandwidth to keep up with. Read professional tax journals and focus on continuing education to remain aware of changes. Visit the IRS and state websites for the latest updates and news, or join an industry association for information on guidance, education and updates.

Be mindful of deadlines, extensions and penalty abatements. The IRS extended the April 15, 2021, filing deadline by one month to May 17, 2021.

Keep connected to your clients without inundating them. Consider communicating with clients via newsletters, emails and even social media sites. Find a platform that is simple for you, one you gravitate towards and one your clients are receptive to. Being informed and knowledgeable reduces their stress. Here are a few more tips that will help them cope:

  • Offer weekly tips. For example, if organizing their tax data is becoming burdensome, suggest working in small manageable sessions. The use of a timer or short playlists of favorite music are valuable aids to frame time.
  • Provide words of encouragement. Remind long-time clients how far they have come in your time together.
  • Remind clients to utilize tools like apps and software to simplify organization. Mint.com, PocketGuard.com and Expensify.com are user-friendly ways to maintain your finances on your phone, laptop or tablet. Some of the best solutions are simple and readily accessible.
  • Suggest clients develop a financial routine. One way of accomplishing this is Money Mondays. A day (and more specifically a time slot) where your clients reconcile their books, file receipts or simply open and sort their mail and any other electronic financial records.
  • Communicate updates on tax deadlines and changes. Time flies when our minds are preoccupied. Gentle reminders can help keep clients on track.

Hope for brighter days ahead

The economy is fragile, and we cannot afford to lose clients to self-preparation methods of filing their taxes. During COVID times we need to take extra steps to ensure our livelihood. A therapeutic approach during these unprecedented times will elevate our practices to a new level. While we are not certified therapists, acknowledging the emotional state of our clients and the environment in which they operate is crucial. Empowered and supported clients are likely to take our suggestions to heart.

Boosting our clients’ confidence and ushering them gently is integral. Clients will remember how you helped them through difficult times. They are more likely to mention your business to friends when the topic of taxes comes up, organically driving more clients to us in the future. When we focus on connecting—human to human—in arduous times, we all become more successful.

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Additional Articles

Medicaid waiver payments – what are they and how do individuals report?April 26, 2021
You make the callApril 22, 2021
NATP state chapters – then and nowApril 21, 2021
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