Medicaid Waiver Foster Payments Become Tax Exempt
Under a recent decision by the Internal Revenue Service, Medicaid waiver payments for foster care may now be exempt from federal taxes, even if the care is provided by a parent to an adult child. The new IRS guidance treats qualified Medicaid waiver payments as difficulty-of-care payments under Section 131 of IRS code regarding foster care payments, making them exempt.
This decision was based on the concept that parents are saving taxpayers’ money by providing nonmedical support and preventing institutionalization of individuals with physical, mental or emotional disabilities. This reverses a previous IRS position that denied the federal tax exemption for parents providing long-term services and supports foster care. In the past, only foster care providers who were unrelated to the individual receiving care qualified for the exemption.
The new guidance applies to payments received on or after Jan. 3, 2014; however, the IRS also said that the guidance may be applied in tax years for which the period of limitations on some claims for a credit or refund has not expired.
When asked for clarification about how the notice affects parents who provided Home and Community-based Services (HCS) Foster/Companion or Host Home services to adult sons or daughters who lived at home in 2013, staff in the IRS Office of Associate Chief Counsel expressed the opinion that parents do not need to submit IRS Form 1099 regarding Miscellaneous Income because of the statute of limitations stipulation.
Parents are encouraged to seek the advice of a tax consultant regarding 1099 forms, amending past tax returns and other clarifications regarding the new guidance, IRS Notice 2014-7.
For More Information
See Notice 2014-7 on foster care payment and Medicaid waivers, in the Internal Revenue Bulletin 2014-4, at irs.gov/irb/2014-4_IRB/ar06.html.
Other Tax Resources for People with Disabilities
- Tax Highlights for Persons with Disabilities and irs.gov/pub/irs-pdf/p907.pdf (PDF)
- Tax Assistance for Individuals with Disabilities and the Hearing Impaired
- More Information for People with Disabilities
- Tax Strategies for Parents of Kids with Special Needs
- Accessible IRS Forms and Publications