How Excluding Medicaid Waiver Payments Adversely Affects Low-Income Taxpayers (2020)
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 a 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-.
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 2019, she qualifies for $3,526 in EITC and $1,400 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?
2020 Update
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.
What about the California EITC?
The tax court decision in Mary and Edward Feigh v. Commissioner (2019) 152 TC No 15 (Feigh) does not change how California administers the California earned income tax credit because the court in Feigh did not determine that qualified Medicaid waiver payments were includible in federal gross income. IHSS payments that are not includible in federal gross income are not be eligible to generate the California earned income tax credit.
The California Legislature enacted the California Earned Income Tax Credit (CA EITC). The California Legislature limited the generation of CA EITC to wages, salaries, tips, and other employee compensation that are includible in federal gross income and subject to California withholding, or net income from self-employment. (California Revenue and Taxation Code (R&TC) section 17052(c)(3) and Internal Revenue Code (IRC) section 32(c)(2).)
Pursuant to IRS Notice 2014-07, Qualified Medicaid waiver payments (which include some IHSS payments) are considered difficulty of care payments and not includible in federal gross income. Accordingly, these payments cannot be used to generate the California earned income tax credits, because these payments are not includible in gross income and thereby are also not subject to California withholding.
The Tax Court in Feigh held that IRS Notice 2014-7 could not reclassify the taxpayer’s Medicaid waiver payment to remove a federal statutory tax benefit granted by Congress, but the court did not address the issue whether the income was includible in federal gross income.
Following the Feigh decision, Medicaid waiver payments are still not includible in federal gross income and are not subject to California withholding and therefore, those payments do not generate the CA EITC under California law. Should the Internal Revenue Service provide guidance to the contrary, the Franchise Tax Board would apply the revised guidance appropriately under California law.
Tony Martinez, EA is a nationally recognized speaker focusing on tax issues affecting immigrants and low-income taxpayers. As the oldest child of Mexican immigrant farm workers, Tony earned a full-ride scholarship to the University of California, Berkeley. Upon graduation, Tony joined Latino Tax Pro to build a national organization that advocates for those in need. Serving the undeserved is his passion.
Sources:
Internal Revenue Service. (2018, March 12). Earned Income and AGI Limits. Retrieved from here.
Internal Revenue Service. (2017, November 29). Certain Medicaid Waiver Payments May Be Excludable From Income. Retrieved from here.
Hungerford, T. L., & Thiess, R. (2013, September 25). The Earned Income Tax Credit and the Child Tax Credit. Retrieved from here.
