Medicaid Waiver Payments Excluded

[Randall]

Client has a W2 for $19,500.  Fed income tax wh $2415.  Paid by 3rd party.  Client provides care for person and lives in that house (under something called Texas CLASS).  Payments seem to be excludable from income under the Medicaid waiver payments.  IRS Notice 2014-7.  It seems he should have a corrected W2 and this amount should not be in Box 1 of W2.  IRS Q&As regarding this says if W2c cannot be obtained, report amount on 1040 line 7 and the negative amount on line 21 as Notice 2014-7.  Anyone else encounter this before?

The real kicker.  Client had health insurance under mom's plan thru Sept.  Then purchased health insurance thru exchange Oct-Dec.  If I take out the $19,500 income, the 8962 puts him under the 100% income level and he has to pay back his advance premium.  Not too bad for 2016 but it this is the same for 2017, he will get hit on the health ins credit.  Would the $19,500 count as his household income even though it is excludable for tax purposes?  I can't find a way to show that in the software.

Any comments would be helpful.

 

[Tax Prep by Deb]

Yes,

I have several of these.  It is handled on line 21 and there is a place, I believe second from the last or third from the last that states medicare waiver and the amount needs to be entered as a negative figure.

[Randall]

What about the Form 8962.  It would seem that this could be added back to modified AGI but there is no place to input it.  It seems to be similar to Fed tax exempt interest.

 

[Tax Prep by Deb]

That I haven't a clue on.  My client's did not have the form 8962.

[Randall]

There's only a couple of things to add back for modified AGI, Fed exempt interest and nontaxable Social Security.  But it would seem these payments would fall into a similar category.

 

[jklcpa]

I think you might be out of luck on adding that back to arrive at modified AGI.  I haven't dealt with this waiver specifically, but that waiver falls under sec 131 of the code, and sec 36B includes only the 3 lines of items to add back to arrive at modified AGI: income excluded under sec 911, the t/e interest, and the portion of n/t social security.   The income waiver under sec 131 isn't one of them.

Sometimes the tax code isn't logical, and even when we wish the outcome to be different, we can't make it come out to a fair outcome. I think it is the case with your client, just like those taxpayers that accept the APTC and then receive a lump-sum payment social security settlement that has a cascade effect on the return and causes the credit's disallowance and payback of the credit.   

[Randall]

I agree jklcpa.  Another side question.  Household income less than 100%, but was expected to be when applying for insurance on the exchange and credit was available.  It seems this would allow an exception for the household income being less than 100%.  This exception seems confusing.  But if I claim this exception, he not only doesn't have to pay back the credit, he gets an even bigger credit, the excess on his tax refund.  Is that right?

 

[Randall]

This just got weirder.  I was preparing amended return (2016 & 2015).  Then realized his mother contributed to a Roth IRA for him.  Ha.  Taking out his W2 income renders him ineligible for the contributions.  Sheesh.