Medicaid-paid caregivers may be able to find relief from income tax in New York

As attorneys Jennifer Raguso and Wayne Carrabus recently wrote about for Long Island Business News, Medicaid and Community-Based Services waiver programs in New York State provide essential support to individuals with disabilities and chronic conditions, allowing them to receive care in their homes or communities rather than in institutional settings.

These programs often involve payments to caregivers, who may be family members or friends, rather than professional aides. The funding is crucial support, but the caregivers should also ensure they maximize the benefits and minimize tax obligations. IRS Notice 2014-7 specifies criteria for excluding Medicaid payments from gross taxable income. This action is justified under “difficulty of care” payments, which is a win-win that enables the care recipient to stay in their home while also providing tax-free income to the caregiver.

Which caregivers qualify?

To qualify for the tax exclusion on Medicaid payments, caregivers must meet specific conditions:

1. The caregivers must reside in the care recipient’s home and not maintain a separate residence, ensuring caregiving activities occur in the primary residence. This condition supports the intent of home-based caregiving.
2. If multiple caregivers live in the same home, each can exclude Medicaid payments from their gross income. This rule recognizes that caregiving is often collaborative, and each caregiver benefits equally.
3. It is crucial to differentiate between payments that qualify for exclusion, such as those for the difficulty of care, and those that do not, like payments for respite care or care provided outside the caregiver’s home, which must be reported as taxable income.
4. Accurate tax reporting is essential for compliance with IRS regulations. Caregivers must correctly identify and exclude qualifying payments from taxable income, and they can file amended tax returns to correct any errors and ensure proper tax treatment. 

Medicaid eligibility criteria for waiver programs

To qualify for Medicaid waiver programs in New York State, individuals must meet specific eligibility criteria, which generally include:

1. Medical necessity: The individual must require a level of care they typically would get in a nursing home or other institutional setting.
2. Financial eligibility: Applicants must meet income and asset limits set by the state. The limits vary depending on the specific waiver programs and the individual’s circumstances.
3. Residency: The individual must be a resident of New York State and a U.S. citizen or qualified non-citizen.
4. Program-specific requirements: Each waiver program may have additional eligibility criteria based on the services provided.

Helping those who help

Navigating the tax implications of Medicaid payments for caregivers in New York State’s waiver programs can be daunting, and mistakes can lead to legal trouble with the state or IRS. So, many find it helpful to work with an attorney who understands this complicated issue and can provide knowledgeable guidance.