2021 Medicaid Waiver payments affecting EITC

[Just-Lisa-Now-]

Client got a late 2021 W2 for taking care of live in relative as part of a Medicaid Waiver Program. 

She made over 20k - box 3&5, but only $683 in shows in box 1 (they corrected it the first month), so I add the W2 with $683, then back it out on Other Income, but that $683 is still adding to earned income and reducing her EITC by $99.   

Cant we choose NOT to use that earned income for EITC purposes? 

Im digging through the EITC worksheet, but Im not finding a place for this.  @TaxGuyBill youre really good at this stuff, where should I be looking...do I have to force it through somewhere?

Or do we wait for the IRS letter and then explain that its excludable income?

[Skylane]

Lisa, 

Follow the W2. 

Only 683 of the 20K earnings is taxable.  If it causes loss of $99 EITC benefit, then that's what it does...... 

The box 1 earned income is not excludable from Line 1a (used to be line 7) or EITC. (but the 20K-683 = $19,317 is... that's how they built this Medicaid program... 

[TaxGuyBill]

For 2021, I think I would enter it on line 6 of the EIC Worksheet as a negative number.  That should correct the amount for EIC.  The other option is to check the box saying it was prison/inmate income.

I'm not sure, but the taxpayer may still get an IRS notice about it. 

For 2022, the W-2 worksheet has a new line "K" that I suspect will work and automatically back it out.  But I haven't tinkered with it much yet.

[TaxGuyBill · Accepted solution]

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@Skylane wrote:

Only 683 of the 20K earnings is taxable.  If it causes loss of $99 EITC benefit, then that's what it does...... 

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IRS Notice 2014-7 says that certain Medicaid Waiver payments are not taxable. Further IRS direction says to back it out if the W-2 shows it.  The IRS also now says you can choose whether you want that income to apply for the EIC calculation or not.

[Just-Lisa-Now-]

I saw the new checkboxes in 2022.  I'll check out Line 6, thanks!

[Just-Lisa-Now-]

The w2 shouldnt have been issued with anything in Box 1, IHSS screwed up and it took a pay period before they fixed it.  

So I wanted the tax return's end result to be as if it was never issued.

TGBs workaround should do the trick.

[garman22]

@Just-Lisa-Now- Lisa, on W-2 worksheet Part VI is "Medicare Waiver Payments" if you enter it there, it should back it out on EIC. 

[Skylane]

Thanks BILL… live and learn… 

[Galt Tax Guy]

Follow up question. 

Amended new client for 2021 & 2022.  IHSS was NOT backed out by prior preparer.

2022 Software allows taxpayer to choose to include ALL, SOME or NONE of the IHSS payment as earned income for EIC calcs.  NB:  The IHSS was her SOLE income.  I included enough of the IHSS (for EIC prposes only) to max out her EIC. 

Could not find that option for 2021?  Was that partial inclusion option avail for 2021

[qbteachmt]

The IRS knows:

https://apps.irs.gov/app/eitc

https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/use-the-eitc-assistant

Yes, things changed. There was an act of Congress (ARPA) and there was a tax court ruling, as I recall.

[qbteachmt]

I found this, too:

https://www.irs.gov/pub/irs-prior/p596--2021.pdf

https://www.irs.gov/pub/irs-prior/p596--2022.pdf

https://www.irs.gov/pub/irs-pdf/p596.pdf