Starting in 2014, certain payments that a taxpayer receives from certain state agencies, the foster care system or Medicaid for caring for someone living in their home under a state’s Medicaid waiver program may be excluded from the taxpayer’s income as provided in Notice 2014-7. These Medicaid waiver payments may be excluded from the taxpayer’s income whether or not the taxpayer is related to the eligible individual receiving the care. Such payments can be made to a taxpayer on a 1099-Misc or a Form W-2 depending upon the issuing state agency.
If the Medicaid Waiver Payments are include on a W-2, the amount reported in Box 1 of the W-2 is reported on Line 1 of the 1040 as part of the taxpayer’s “Wages, salaries, tips, etc.”, and then the non-taxable amount is subtracted as “Other Income” on Schedule 1, line 21 with a notation of “Notice 2014-7”. Prior to the changes in the Form 1040 that occurred in 2018, wages and other income were reported on different line of the Form 1040.
If the payment is made to the taxpayer on a 1099-Misc, the taxpayer is required to report the full amount reported on Form 1099-MISC as income on line 1 of Form 1040 (Schedule C). The taxpayer should then report the excludable amount as an expense in Part V of Schedule C, and write “Notice 2014-7” next to that amount.
Regardless if these amounts are reported on a W-2 or a 1099-Misc, these amounts are excludable from income and they are not self-employment income and are not subject to self-employment tax. However, as a result of a tax court ruling issued in May of 2019, these Medicaid waiver payments may be considered earned income for the purposes of the Earned Income Credit.
To enter Medicaid Waiver Payments for payments made to the taxpayer on a W-2, enter the W-2 by following the steps below:
- Income Menu
- Wages, Salaries, Tips (W-2)
- On the W-2 Menu, select ‘New’ and enter the W-2 exactly as reported by the agency or contractor retained by the agency to administer such payments.
If the payments made to the taxpayer were reported to the taxpayer on a W-2, any amount reported in Box 1 of that W-2 that is subject to the Medicaid Waiver is then entered in Box e – Medicaid Waiver Payment in Box 1 on the W-2 entry screen. The tax program will then carry that amount to Schedule 1, Line 8 with the correct notation of “Notice 2014-07” and it is subtracted from the income of the taxpayer.
Upon exiting this W-2 in the tax program, the user will be asked “Do you want to include Medicaid Waiver Payments in the calculation of Earned Income?” If the taxpayer answers YES to this question they are electing to include these payments in their earned income, but not their taxable income. The Medicaid Waiver amount will then be included in the calculation of the taxpayer’s earned income for the purpose of Earned Income Tax Credits and any Additional Child Tax Credit.
To enter Medicaid Waiver Payments for payments made to the taxpayer on a 1099-Misc, enter the 1099-Misc by following the steps below:
Income Menu Form 1099-MISC On the Form 1099-MISC Menu, select ‘New’ and enter the 1099-Misc exactly as reported by the agency or contractor retained by the agency to administer such payments.
The taxpayer should report the full amount reported on Form 1099-MISC as income on line 1 of Form 1040 (Schedule C). The taxpayer should then report the excludable amount as an expense in Part V of Schedule C, and write “Notice 2014-7” next to that amount. These amounts are excludable from income and they are not self-employment income and are not subject to self-employment tax.
The 1099-Misc must be linked to a Schedule C, this can be accomplished by marking the Link Box located above Box 3 on the 1099-Misc entry screen. Any amount reported in either Box 3 or Box 7 of the 1099-Misc that is subject to the Medicaid Waiver is then entered in Box e – Medicaid Waiver Payment (Box 3 or 7) on the 1099-Misc entry screen. The tax program will carry any income amount entered on Box 3 or 7 of the 1099-Misc to Line 1 of the linked Schedule C, and with the correct notation.
Upon exiting this 1099-Misc in the tax program, the user will be asked “Do you want to include Medicaid Waiver Payments in the calculation of Earned Income?” If the taxpayer answers YES to this question they are electing to include these payments in their earned income, but not their taxable income. The Medicaid Waiver amount will then be included in the calculation of the taxpayer’s earned income for the purpose of Earned Income Tax Credits and any Additional Child Tax Credit.
NOTE: This is a guide on entering Medicaid Waiver Payments into the tax program. This is not intended as tax advice.
Additional Resources:
Instructions for Form 1040
Notice 2014-7 – Foster Care Payments, Medicaid Waivers