- 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.