Medicaid Waiver Payments....can I exclude?

[lab]

I am looking for a little clarification on Medicaid Waiver Payments. This recently came to my attention and I have read a lot of information and came out with more questions than I started with. I have a client that takes care of her mother in their home. I asked her and she said she is paid for nonmedical support services by Caresource. I was not aware of a waiver for this type of service so I want to amend the returns if she is entitled to exclude the income. 

Some years she only cared for mom and other years she had other clients as well that she traveled to their house. I am trying to figure out how I determine if she is really entitled to exclude the income. Everything says that the income should not have been reported if Caresource knew it qualified and they knew she was caring for mom in the home so that is why I am concerned she may not qualify for some reason. I know I can only exclude payments for her mom and not other clients. 

I also see that it is excluded from federal income but you still pay social security and medicare taxes on it if on a W2. If I exclude a 1099 which is on Schedule C those taxes will not be paid. 

Can she still claim mom as a dependent?

I have to act fast to get 2015 amended under the wire. I appreciate any help you can give. Thanks!

[Just-Lisa-Now- · Accepted solution]

Ive only had people that get W2s from In Home Support Services for caring for disable relatives in their home and we exclude the wages on the return....not all of them have SS and Medicare withheld on their W2. 

You would put the income on Sch C then take it back off as an expense with the description of:  

Excluded income per IRS Notice 2014-7

I've gone back and amended multiple years returns for several people that weren't aware of this exclusion.

[Marc-TaxMan]

As Lisa said, "in their home."  Means both parties (caregiver and patient) reside together.

[lab]

Thank you! So there are no other additional hurdles to overcome? It is simply she lives in the same house as her mother that she cares for, it is for nonmedical care and paid by caresource which is a medicaid provider? I am good to exclude it? Can she claim Mom as a dependent? If not I need to amend that part of the returns as well.

[itonewbie]

"So there are no other additional hurdles to overcome? It is simply she lives in the same house as her mother that she cares for, it is for nonmedical care and paid by caresource which is a medicaid provider? I am good to exclude it?"

You need to review the nature of the payment your client received and the program under which it is paid to ensure it meets the conditions stipulated in the Notice Lisa cited.  You should also read the Q&A published by the IRS in conjunction with the Notice if you have not already done so (even though you "have read a lot of information").

Since she has "other clients", it does sound like she is in a trade or business for providing care services and the income would be reportable on Sch C as you mentioned.  If she is eligible for Medicaid waiver, a negative amount for the excluded income should be recorded in Part V as “Notice 2014-7”, according to the Q&A, and the excluded income would not be subject to SE tax.

As for whether your client could claim the mother as a dependent, Notice 2014-7 should not be relevant.  The question is whether her mother met all the usual conditions for being a dependent of hers.

[kgudgel]

You may want to be cautious how to enter this in light of Feigh vs. Commissioner (152 TC N. 15 from May 2019). 

The Feigh decision means that clients receiving Medicaid Waiver payments (also called Difficulty of Care payments) may not only exclude the payments from gross income, but may CHOOSE to include it as earned income for the earned income credit and child tax credit.  If you simply subtract the Medicaid Waiver Payment as an expense on the Schedule C (subject to Notice 2014-7), then there will be no earned income.

So, if your client chooses, they will report the income on Schedule C and pay self-employment taxes on it.  Then as "Other Income" will be a negative amount of the payments with the comment "Notice 2014-7).  The Other Income line will remove it from gross income, but it will stay as earned income.

Clients may also choose to exclude from both gross income and earned income - in which case reporting it as an expense on Schedule C works.

But as others pointed out, to allow the exclusion from gross income subject to Notice 2014-7, the caregiver and their "patient" must reside in the same house.

[HEYSOAPY]

Be careful as these answers are mostly incorrect ways to handle the situation.