How can I adjust Earned Income to exclude Medicaid Waiver Payments for calculating the EIC?

[YoCPA]

I have a client, MFJ with two children. Their total Earned Income is $60k, which just barely disqualifies them from claiming the EIC. However, the wife worked as a live-in caregiver for her elderly mother. Per IRS Revenue Ruling 2014-7, these wages qualify as "difficulty of care" payments (also referred to as medicaid waiver payments). They are excludable from taxable income, and the taxpayer may decide whether or not to include/exclude them for the purposes of the EIC calculation. 

Excluding these caregiver wages from taxable income is easy enough, but Lacerte automatically INCLUDES them in the EIC calculation. I'd like to EXCLUDE them from the EIC calculation as well, which would lower their Earned Income to the point that they would qualify for the EIC. I'm not seeing any way to do this in the software - any guidance would be appreciated. Thank you. 

[jharvey · Accepted solution]

Have you tried going into the "Child Tax Credits, EIC, Other Credits" input screen and entering a negative adjustment in the EIC section for "Earned income"?

[VJRog]

I have this same issue in Pro Series and had a client's 2023 EIC (that was calculated in Pro Series) reversed by the IRS because the total W2 income flowed to line 1.

The medical waiver is subtracted on Schedule 1, line 8s which then flows to the 1040 line 8 as a negative number which eventually adjusts the AGI, but the EIC calculation the IRS used was the total income from the W2s as earned income.

The instructions for the 1040 and the Schedule 1 do not correctly address the problem.

This is the first time having this issue after many years and I just learned about it when they provided paperwork for preparing their 2024 return which included the IRS letter and is now too late to appeal.