Excluding Medicaid Waiver Payments Adversely Affects Low-Income Taxpayers
On January 3, 2014, the IRS issued Notice 2014-7 addressing the income tax treatment of certain payments to a caregiver under a state Home and Community-Based Services waiver (Medicaid waiver) program. The notice provides that the IRS will treat “qualified Medicaid waiver payments” as difficulty of care payments excludable from gross income under § 131 of the Internal Revenue Code.
Qualified Medicaid waiver payments are defined as “payments made by a state or political subdivision thereof, or an entity that is a certified Medicaid provider, under a Medicaid waiver program to an individual care provider for nonmedical support services provided under a plan of care to an eligible individual (whether related or unrelated) living in the individual care provider’s home.”
So basically, if a caregiver lives in the same home of the individual receiving care services, they can exclude these payments from gross income. An example of this is a mother caring for her disabled daughter or an adult son caring for his elderly mother. The individuals don’t have to be related, they just need to live together.
At first, this seems like great news. Excluding income reduces your tax liability which leaves more money in your pocket. But what if you depend on this income to qualify for earned income tax credit (EITC) or additional child tax credit (ACTC)? What if the mom caring for her disabled daughter survives on Medicaid waiver payments? Does she still qualify for EITC or CTC?
On February 23, 2015 the IRS updated Notice 2014-7 to provide further guidance. They included 20 new Q&A’s to address confusion and concerns. One of the main questions raised was: Is excludable income still considered earned income for EITC and ACTC purposes? Q&A #9 addressed this question:
Question # 9: “May I choose to include these payments in my gross income for 2014 and later years?”
Answer #9: “No. A taxpayer may not choose to include in gross income difficulty of care payments that are excludable from gross income under § 131 as provided in Notice 2014-7”.
This was a huge blow to hundreds of thousands of taxpayers who depend on this income to qualify for EITC and ACTC.
Consider a single mom receiving $17,300 in Medicaid waiver payments to care for her disabled daughter. As her only source of income for 2017, she qualifies for $3,400 in EITC and $1,000 in ACTC. However, because her Medicaid waiver payments are excludable from gross income, she gets nothing.
Was this the intent of Notice 2014-7? To strip away a much-needed tax refunds from low income taxpayers with disabled family members? Or is this an unintended consequence of the Notice? Did anyone bother to see how this Notice was going to affect low-income taxpayers who depend on their tax refund to survive and avert poverty?
The Tax Court in Feigh, (2019) 152 TC No. 15 has ruled that Medicaid Waiver payments, even though excluded from income, are still earned income for purposes of claiming refundable tax credits like the additional child tax credit and the earned income tax credit. The Court reasoned that IRS cannot remove a statutory benefit provided by Congress
The IRS has updated Notice 2014-7 Question 9 to "reserved". We have reached out to the IRS to provide further guidance on this issue. Stay tuned for more updates.
Internal Revenue Service. (2018, March 12). Earned Income and AGI Limits. Retrieved from https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/eitc-income-limits-maximum-credit-amounts-next-year
Internal Revenue Service. (2017, November 29). Certain Medicaid Waiver Payments May Be Excludable From Income. Retrieved from https://www.irs.gov/individuals/certain-medicaid-waiver-payments-may-be-excludable-from-income
Hungerford, T. L., & Thiess, R. (2013, September 25). The Earned Income Tax Credit and the Child Tax Credit. Retrieved fromhttps://www.epi.org/publication/ib370-earned-income-tax-credit-and-the-child-tax-credit-history-purpose-goals-and-effectiveness/