If you receive payments through a state Medicaid Home and Community-Based Services (HCBS) Waiver program, you may be able to exclude those payments from your taxable income under IRS Notice 2014-7. The IRS treats qualifying Medicaid waiver payments as "difficulty of care" payments that can be excluded from gross income under Internal Revenue Code Section 131.
Even though these payments may be tax-exempt, you can choose to include them as earned income when calculating certain tax benefits, such as the Earned Income Credit (EIC), if eligible.
Medicaid Waiver Payments Reported on Form W-2 (Box 1)
If your Medicaid waiver payments are included in Box 1 of your Form W-2 and are not reported in Box 12 with Code II, enter the payments using the Medicaid Waiver Payment field in the W-2 section of the program.
Follow these steps:
- Go to Federal.
- Select Income (My Forms).
- Open W-2.
- Enter the amount in the Medicaid Waiver Payment box.
Important: If Box 1 on your W-2 is blank, enter the Medicaid waiver payment amount in Box 1 when entering your W-2 information.
Medicaid Waiver Payments Reported on Form W-2 (Box 12, Code II)
If your W-2 reports Medicaid waiver payments in Box 12 with Code II, no additional Medicaid waiver entry is required.
When entering your W-2:
- Go to Box 12.
- Select Code II from the dropdown list.
- Enter the amount shown on your W-2.
Medicaid Waiver Payments Not Reported on a W-2
If you received qualifying Medicaid waiver payments but did not receive a Form W-2, report the income using the Medicaid Waiver Payments entry screen.
Follow these steps:
- Go to Income (My Forms).
- Select Less Common Income.
- Choose Other Compensation.
- Select Medicaid Waiver Payments (Not Reported on W-2).
Medicaid Waiver Payments Reported on Form 1099-NEC
If your Medicaid waiver payments were reported on Form 1099-NEC:
- Go to Federal.
- Select Income (My Forms).
- Open 1099-NEC.
- Enter the amount in the Medicaid Waiver Payment field.
How to Include Medicaid Waiver Payments for the Earned Income Credit (EIC)
Although qualifying Medicaid waiver payments can be excluded from taxable income, taxpayers may elect to include the payments as earned income when calculating the Earned Income Credit if doing so is beneficial.
To make this election:
On a W-2
While entering your W-2, check the box labeled:
"Select if you want to include Medicaid Waiver payments in the calculation of earned income."
This option is located below the Box 14 section.
On a 1099-NEC
A similar checkbox is available in the 1099-NEC interview if you want the Medicaid waiver payments included in the earned income calculation.
Keep in mind that including these payments for EIC purposes may increase or decrease your credit, depending on your overall income and tax situation.
Additional Information:
For more details about qualifying Medicaid waiver payments, eligibility requirements, and IRS reporting rules, see the IRS resource Certain Medicaid Waiver Payments May Be Excludable From Income and Notice 2014-7. To find more information about this, please click Here.