The rule (Notice 2014-7, 2014-4 I.R.B. 445)
- IRS treats certain state Medicaid waiver payments as “difficulty of care” foster payments.
- When you live in the same home as the individual you serve, those payments can be excluded from gross income.
- Applies to California IHSS live-in caregivers if the service recipient lives with you.
Common filing mistakes we see
- H&R Block, Jackson Hewitt, TurboTax, and some local preparers reporting IHSS as taxable wages.
- Entering a W-2 without adjusting for excludable “difficulty of care” amounts.
- Missing the exclusion on amended returns, leaving refunds unclaimed.
- Not coordinating state and federal treatment (California generally conforms for IHSS).
How auditors and tax pros handle substantiation
- Proof of shared residence (lease, utility bills, affidavit, county IHSS documentation).
- IHSS payment statements showing the caregiver and recipient.
- Documentation that services fall under the state’s Medicaid waiver program.
If you paid too much in the last 3 years
- Amend to exclude eligible IHSS payments from income.
- Correct related credits and benefits (EITC/CTC/CalEITC, refundable credits) that may increase with lower AGI.
- Consider state amendments where required.
Key takeaway: Live-in IHSS payments are often excludable. If they were reported as taxable, you may be due refunds.
