IAM Accounting Website

If You are Receiving Medicaid Waiver Payments, You Should Read This

Article Highlights:

  • What are Medicaid Waiver Payments? 
  • IRS Ruled Them to be Non-Taxable 
  • Taxpayer-Favorable Tax Court Case 
  • Tax Credits 
  • Amended Returns 
Medicaid waiver payments are a type of payment from a state to an individual to take care of another individual who would otherwise be institutionalized, saving the government the cost of the more expensive institutional care.

Back in 2014, the IRS ruled that Medicaid waiver wages would be mandatorily excludable from gross income (not taxed) if the caregiver provided care in the caregiver’s home. This exclusion from taxable income applied regardless of whether the caregiver and the care recipient were related.

Prior to this ruling, payments were taxable and treated as W-2 wages. As such, they were categorized as earned income, which qualified many lower-income individuals for the earned income tax credit (EITC) and, in some cases, for the additional child tax credit (ACTC).

However, this change was a double-edged sword, providing tax-free income for some taxpayers but eliminating others’ ability to qualify for the EITC and ACTC, since the IRS had specified that the payments had to be excluded from gross income, thus eliminating the earned income needed to qualify for the credits.

One couple, the Feighs, disagreed with the IRS’s position. The Feighs received Medicaid waiver payments as wages for caring for their disabled adult children in their own home. When the Feighs filed their tax return, they excluded the income but still treated it as earned income for the EITC and the refundable child tax credit. The IRS took umbrage to that position and the case ended up in Tax Court.

The Tax Court held that the IRS could not reclassify the taxpayer’s Medicaid waiver payment so that it no longer qualified as “earned income” for the purpose of determining tax credits. The Court reasoned that IRS cannot remove a statutory benefit provided by Congress. On March 30, 2020, the IRS acquiesced to the court’s decision, meaning that returns from prior years for which the statute of limitations has not expired can be amended to claim the EITC and ACTC even though the Medicare waiver payments are being excluded from income.

It is important to contact this office immediately if you received Medicaid waiver payments in 2016, since the statute of limitations for claiming a 2016 refund expires on July 15, 2020 for most individuals. Not everyone will qualify for EITC and ACTC, so please contact this office to see if you qualify and if amending your 2016 return would be to your benefit.



Share this article...
Facebook
Twitter LinkedIn Pinterest Pocket Reddit Email

Want tax & accounting tips and insights?

Sign up for our newsletter.

I confirm this is a service inquiry and not an advertising message or solicitation. By clicking “Submit”, I acknowledge and agree to the creation of an account and to the and .

Our Team

At IAM Accounting LLC, we take pride in our diverse and experienced team of professionals, each dedicated to providing exceptional service in accounting, tax planning, payroll, and financial management. Our team members bring a wealth of knowledge from various financial backgrounds, working together to ensure that every client receives the personalized attention and expertise they deserve. From managing complex accounting operations to providing tax-saving strategies, we’re here to help you achieve your financial goals with precision and care.

  • Ibrahim Mohammed

    Founder & Tax Strategist

    Ibrahim leads IAM Accounting LLC, offering expert tax strategies and financial guidance to help clients reduce tax liabilities and achieve their financial goals.

  • Jasleen Daswal

    Controller

    Jasleen is a highly skilled Controller with over five years of experience as a Chartered Accountant. She ensures accurate financial management and oversees accounting operations.

  • Sahil Shaikh

    Chartered Accountant & Tax Preparer

    Sahil is a Chartered Accountant and tax preparer with expertise in tax compliance, financial reporting, and strategic tax planning, helping clients optimize their financial outcomes.

  • Ankit Gupta

    Accounts Associate

    Ankit brings a wealth of experience in finance and accounting, providing key support in day-to-day financial operations to ensure accuracy and compliance.

  • Neha Sharma

    Key Accounts Manager

    Neha manages our most valued client relationships, with over four years of experience as a Chartered Accountant, ensuring that client needs are met efficiently and professionally.

  • Michael Holsinger

    Payroll Representative, ADP Partner

    Michael is our dedicated payroll expert and ADP partner, managing payroll processes with precision and helping clients navigate payroll services seamlessly.