Medicaid Waver Payments and EIC

[GingerU]

I don't know if anyone else has dealt with this, but I have a customer that receives Medicaid Waiver Pmts. The money is not included in income per the IRS Notice 2014-7. In the past, ProConnect Online did not include this as income for EIC, but now it is. We don't want it to because it puts their income over the limit for EIC. Per the 2019 IRS pub 596: You may include these payments in earned income if you benefit from the inclusion. This customer receives a W-2 for the payments (her choice as she wanted to have tax withholding), so it is being picked up as income for EIC purposes in ProConnect. There is an adjustment box in the EIC entry section, but I hate to use those...however, if I want to back the Medicaid waiver pmts off of earned income, I may have to. The Tax Court case Feigh (2019) 152 TC No. 15 comes into play, but it still is not clear that it "must" be included in earned income for EIC. It is interesting to note that the state return backs the payments off for their EIC calculation.  Any thoughts? 

[BobKamman · Accepted solution]

You have done your homework by finding the Feigh case.  But you still can't finish the assignment, because it (purposely) left some questions unanswered.  It's an interesting opinion, though, and should probably be read by those who today are holding sacred every IRS "Notice."  For some background on Feigh, the low-income taxpayer clinic lawyer who represented the taxpayers has written about it here:

https://procedurallytaxing.com/invalidating-an-irs-notice-lessons-and-whats-to-come-from-feigh-v-c-i...

I haven't looked at Pub 596, but if it says "you may" and not "you must," then I would decline to exercise that option, leaving it out of the EIC computation, but advising the client that IRS Pubs are not sacred either, and they may get caught up in this controversy for years to come.  

[TaxGuyBill]

The 2020 IRS publications seem to make it clear to me that it is on optional thing, so you can do whichever way has the best result.

As for how to do it, I think you would need to use the adjustment box.  

[GingerU]

Thank you!