IHSS Payments - are they now taxable by California or not?

Thanks ColleenD3,

"No, it is not taxed federally nor by CA"

I was under the impression that it IS taxed federally, since I do not live with my recipient. Is this something new where it's exempt from federal tax? 

Tax-Exempt Medicaid Waiver Payments from IHHS 

TurboTax can exempt income under Notice 2014-7 per the IRS instructions for Medicaid Waiver payments from IHHS. This Notice provides that certain payments received by an individual care provider under a state Medicaid Home and Community-Based Services Waiver (Medicaid waiver) program are difficulty of care payments and excludable as income. Additionally, you can choose to use this income to calculate Earned Income Credit. Regardless, the income will remain non-taxable.    

This tax-exempt income can be reported to you differently depending on the State and County you live in. You might receive a W-2, 1099, and no form at all.  

See the instructions below for how to report this depending on how the income was reported to you. 

If you received a W-2 with $0 in Box 1: 

1. Sign in to TurboTax Online, click Continue to your return, then pick up where I left off (if you are using TurboTax CD/ Download, then just open your return on your computer);    
2. Click on Federal Taxes, and then click on Wages & Income;    
3. Under Wages and Income, click Start;     
4. Click on Work on my W-2, and enter the information as reported on your W-2.    
5. After entering all your W-2s, you will see the screen, Let’s check for uncommon situations. Next to Nontaxable Medicaid waiver payments, check the box. 
6. You will enter the amount of Medicaid Waiver Payments into the box asking for the total amount of difficulty of care payment you received from IHHS. This will be the same amount reported in Boxes 3 and 5 of your W-2. 
7. When you get to the Earned Income Credit section under the  Deductions and Credits portion of your return, you will be asked if you want to add your Medicaid waiver payment to your income for this credit. You can try it both ways, including it and excluding it from the calculation for the credit and see which way benefits you most. 

If you received a 1099 or no form: 

1. Sign in to TurboTax Online, click Continue your return, then pick up where I left off (if you are using TurboTax CD/ Download, then just open your return on your computer);    
2. Click on Federal Taxes, and then click on Wages & Income;    
3. Scroll down to Less Common Income;      
4. Click on Start next to Miscellaneous Income, 1099-A, 1099-C. 
5. Click on Start next to, Other income not already reported on a Form W-2 or Form 1099;     
6. Answer Yes to Did you receive any other wages?;     
7. Leave blank the box for Wages earned as a household employee and click continue; 
8. Leave blank the box for Sick or disability pay and click continue;      
9. Enter the amount of Medicaid waiver payments on Certain nontaxable Medicaid waiver payments not reported on Form W-2, and click Continue. 
10. When you get to the Earned Income Credit section under the  Deductions and Credits portion of your return, you will be asked if you want to add your Medicaid waiver payment to your income for this credit. You can try it both ways, including it and excluding it from the calculation for the credit and see which way benefits you most. 

 
For more information, refer to IRS Notice 2014–7, 20144 I.R.B. 445 and the IRS FAQs.   

You would only refer to your paystub if you need to report the income for purposes of the Earned Income Credit; you don't enter this in the W-2 section if you didn't receive a W-2. Qualifying Medicaid waiver payments are exempt from Federal and California income.

Your In-Home Supportive Services (IHSS) income may be exempt for both your California and your Federal returns if you received income from a Medicaid waiver or IHSS program for providing care to an individual you lived with.

If your income was exempt, you didn't have any taxes taken out, and didn't receive a Form W-2, you don't have to report the income on your returns.

If you wanted to use the income to qualify for Earned Income Credit:

1. Sign in to TurboTax and open your return.
2. Select Federal, then Wages & Income.
3. Under Less Common Income, select Start or Revist next to Miscellaneous Income, 1099-A, 1099-C.
4. Select Start or Revisit next to Other income not already reported on a Form W-2 or Form1099.
5. Answer Yes to Did you receive any other wages?  and Continue.
6. Continue through the screens, leaving the boxes blank until you get to the Certain nontaxable Medicaid waiver payments not reported on Form W-2 or 1099 screen.
7. Enter the amount of Medicaid waiver payments and Continue.
8. Finish entering the rest of your income.
9. When you get to the Earned Income Credit section in Deductions and Credits, we’ll ask if you want to add your Medicaid waiver payment to your income for this credit. You can answer based on what benefits you most.

See this TurboTax help article under "I received a 1099 or no form" for more information.

 [Edited 02/12/24| 9:51am PST] 

 @Itsjess73    (edited)