Question: Mary received Form W-2, Wage and Tax Statement, for tax year 2023 from her home state’s Medicaid program. The payments are for the care of her incapacitated father who she lives with in his home to provide care for him. Are these payments truly wages for which Mary has no choice but to claim as income?
Answer: No. As long as the circumstances outlined below apply, the income could be classified as difficulty of care payments.
The individual care provider must have the same home as the eligible person receiving care. (The caregiver must live in the home of the eligible person. The caregiver cannot provide care during the day and then go to another residence in the evening.)
- It must be under a state Medicaid waiver program or similar program. This allows the state to include in the state’s Medicaid program the cost of home or community-based services (other than room and board) provided to individuals who otherwise would require care in a hospital, nursing facility, or intermediate care facility (eligible individuals). Home or community-based services includes personal care services, habilitation services, and other services that are “cost effective and necessary to avoid institutionalization.
Remedies: If these circumstances represent Mary’s situation, record the amounts from the Form W-2 on Line 1a of Form 1040. Then proceed to Form 1040, Schedule 1, Line 8s, Nontaxable amount of Medicaid Waiver Payments included on Form 1040, Line 1a or Line 1d. Enter the amount from Form 1040 Line 1a or Line 1d. This will zero out the wages included on Form 1040.
For more information see IRS Notice 2014-7 and §131.
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Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing. All taxpayer circumstances are different, and NATP recommends contacting research services if you have specific questions about your clients’ tax situations.