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.