Reference: IRS Publication 4491, Chapter 16-2 (it’s page 200 of the online PDF)
Reporting source: IRS Oakland SPEC
Certain payments made to individual care providers must be excluded from gross income. Locally, these payments are commonly reported on W-2’s from In-Home Supportive Services (IHSS) with a Roseville, CA address. Generally, if the care provider and recipient live in the same home, payments are not taxable and must be excluded from gross income.
If a taxpayer’s only income is from these types of payments, they still have to file a return to reconcile the amounts reported on the W-2’s. This will result in a $0 income return, and the taxpayer will not qualify for any tax credits. Any withholding on the payment amount will be refunded. These returns must be filed on paper.
How to treat such income on an income tax return (using TaxWise):
- W-2’s should be input as usual. Make sure to check the box at the top of the form that says “check to take calculations off line 16, state wages” before putting in the amounts. This should result in zero on line 16.
- Back out the W-2 amount on 1040 line 21 other income, by following these steps:
- From the 1040 page 1, click on line 21 field
- Link to worksheet 7
- On 1040wkt7 line 16 (Medicaid waiver payments), enter amount from W-2 box 1 as NEGATIVE amount (put minus sign before number). If there is more than one W-2, link to a scratchpad and the software will do the addition for you. This will also allow you to detail the payer for each W-2.
Reporting source: Magesh
1. What income qualifies as Medicaid Waiver payment: https://www.irs.gov/Individuals/Certain-Medicaid-Waiver-Payments-May-Be-Excludable-From-Income
2. How to treat such income on an income tax return: https://ttlc.intuit.com/questions/2635384-qualified-medicaid-waiver-payments-on-a-w-2-show-as-earned-income-for-eic
3. How it’s not considered earned Income for EIC: https://www.irs.gov/publications/p596/ch04.html
4. How to negate the income amount in TaxWise after adding the (incorrect) W-2 :