If you provide care to an individual who has a physical, mental, or emotional handicap, the difficulty of care payments you receive are generally excluded from income. Review the information below to determine how to report these payments, if necessary, on your tax return.
According to the IRS website Certain Medicaid Waiver Payments May Be Excludable From Income:
On January 3, 2014, the IRS issued Notice 2014-7 addressing the income tax treatment of certain payments to an individual care provider 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. For purposes of the notice, qualified Medicaid waiver payments are payments by a state, a political subdivision of a state, or 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 individual (whether related or unrelated) living in the individual care provider’s home.
Exception: Difficulty of care payments are not excludable to the extent that the payments are for more than 10 qualified foster individuals who have not attained age 19 or 5 qualified foster individuals who have attained age 19.
Generally, amounts reported to you in Box 3 of Form 1099-MISC are reported on Form 1040, Line 21 as other income. However, if you choose to apply the Notice to payments received in 2017, you would not include the payments on Line 21. If you are filing electronically, do not report the Form 1099-MISC. If you file a paper return, write "Notice 2014-7" to the left of Line 21.
Generally, amounts reported to you in Box 7 of Form 1099-MISC are reported on Schedule C as business income. If you choose to apply the Notice to payments received in 2017, you will enter the income on Schedule C through the Form 1099-MISC, but will also report the excludable amount as a Schedule C expense.
To enter the Form 1099-MISC, Box 7 income on Schedule C:
If you have not already entered the applicable Schedule C information:
Once you have entered the Form 1099-MISC income, the program will bring you through additional screens to complete the Schedule C. To enter the excludable amount as an expense, continue to the screen titled Business Income - Expenses, and click Yes. Continue to the screen titled Business Income - Expenses with an entry field for Qualified Medicaid waiver payments exclusion (Notice 2014-7). Enter the excluded amount on this screen.
Below are the steps to remove the Self-Employment Tax by entering an adjustment for Schedule SE:
Generally, amounts reported to you in Box 1 of Form W-2 are reported on Form 1040, Line 7 as wages. If you choose to apply the Notice to payments received in 2016, you will enter the income in the Wages and Salaries section of the Federal Q&A, but will also report the excludable amount as a negative adjustment on Form 1040, Line 21.
To enter the Form W-2:
To enter the adjustment on Form 1040, Line 21:
When you print your return, the text See Attached will print to the left of Line 21 on the Form 1040. An attached sheet will print with the return titled Other Income - Supporting Details for Form 1040, Line 21 which will print both the description and amount that was entered.
Note: The link in the information above is updated each year automatically. It will take you to the most recent IRS version of the form instructions at the time it is accessed.