“Difficulty of Care” income tax exemption

Difficulty of Care payments exempt as Income
As of 2014, there is a gross income exemption for caregivers who live with the person they care for through a HCBS Medicaid waiver.

In Texas, those waivers are:

• CLASS
• HCS
• Star+Plus Waiver
• TxHmL
• MDCP
• DBMD
• YES

The Difficulty of Care exemption exempts income from caring for a person living in the same home from being included as Gross Income.

Highlights:

1. If the “provider of care” lives with the “recipient of care”, then their income is NOT part of their gross income.
2. This applies if the “provider of care” is related or not –  the parent or a non-related person.
3. This is not OPTIONAL – if this applies to you, you are legally required to exempt this income from your gross income

Action Steps:

1. If you are the paid “provider of care” for a Medicaid waiver recipient in a home you share with them, sign the Statement of Eligibility for Difficulty of Care Exemption.
2. Turn in the signed statement to the Financial Management Service agency completing payroll for the recipient.
   • If they are unfamiliar with this exemption, provide them with a link to the IRS Notice 2014-7 and the IRS Question + Answers to clarify how to implement this.
3. File “Form 1040X, Amended U.S. Individual Income Tax Return” for 2014, 2015, 2016, if the living arrangement was the same at that time. (see Q10 & A10).
   • You will adjusting your gross income as described in Q11 & A11.
   • This will result in an adjustment of taxes, deductions, and credits.
   • When the IRS pays the refund, they will include INTEREST!

Any tax professional should be able to read the IRS Notice 2014-7 with the IRS Question + Answers, and implement these adjustments.

It is included in 2 popular tax softwares, but they may not include the adjust mentioned in Q11 & A11 if the payroll company has not issued the correct W2 information.

• TaxAct link to information on Notice 2014-7
• TurboTax link to information on Notice 2014-7
• Not found in H&R Block tax software
• Not found in Credit Karma tax software

If you are in the Houston area, and cannot find a tax professional who is willing to read the IRS Notice and follow the directions, I can recommend Patricia at P Thorne & Associates.

Also, here are PDFs you can print to share this information:

• IRS Notice 2014-7 Difficulty of Care payment exemption
• Tax Exemptions Handout (1 page)
• Statement of Eligibility for Difficulty of Care Exemption
• IRS Q&A Certain Medicaid Waiver Payments May Be Excludable From Income
• Handout on Difficulty of Care tax exemption (multipage)