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Discussion:In-home Adult Foster care Federal Income Exemption

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Discussion Forum Index --> Tax Questions --> In-home Adult Foster care Federal Income Exemption


Adam13 (talk|edits) said:

17 March 2014
I have a client who has had a change in payment methods for her income. She is an in-home care provider with an individual who was assigned to her through a state program. Essentially adult foster care. These payments come through a third party and are covered under the federal income exemption provided for in §131.

In years past she has been a 1099 worker, so exempting the income that is covered under §131 was rather easy to do on her schedule C. However, in 2013, they sent her a W-2. I don't care for this for obvious reasons, but the biggest reason is that it complicates exempting her §131 income.

Figured I'd query the field to see how you would handle this. Technically, she is not covered by the statutory employee guidance here: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Statutory-Employees , and her W-2 does not indicate that she is a statutory employee.

I appreciate your thoughts.

Kevinh5 (talk|edits) said:

17 March 2014
Line 21 of the 1040.

Bonus points if you show your work in an attachment.

Adam13 (talk|edits) said:

17 March 2014
Kevin,

Here is an additional question, since this income is showing up on a W-2, that implies "earned income". Wouldn't the reduction be a reduction of "earned" income? And if so, can you properly do that on line 21? My understanding is that this would need to be done on the schedule C.

The reason I ask is that the EIC comes into play. If this exemption does not effectively decrease earned income, then my client loses out on quite a bit of EIC this year.

On the contrary, if the reduction is not an "earned income" reduction, then the income shouldn't be considered "earned" in the first place.

Perhaps I'm making this harder than it needs to be.

Thanks Kevin, you are always very helpful and on point.

P.S. For those that may not have been updated that are viewing this thread, IRS Notice 2014-7 states that as a provider, you can exempt your receipt of medicare payments related to care of a biological family member (as long as they are qualified), and that the change in stance from the IRS is retroactive to returns that are still open under the statute of limitations. Prior to this, the IRS has contested that such payments must be included in income. http://www.irs.gov/pub/irs-drop/n-14-07.pdf

EZTAX (talk|edits) said:

18 March 2014
Adam - when you say "in home" care provider - in whose home?

Adam13 (talk|edits) said:

18 March 2014
This is in the provider's home, my client. Essentially, these persons are placed into their home, and the taxpayer is essentially an adult foster family. It's actually pretty amazing the impact that this setting has.

EZTAX (talk|edits) said:

18 March 2014
Great, just wanted to make sure you were understanding this right.

Kevinh5 (talk|edits) said:

18 March 2014
Well, short of getting a corrected W-2, you will have to figure out how to jimmy it or override the software. Creating a Sch C is jimmying it. So is line 21. Be prepared to substantiate everything in this one, you have a high liklihood of a CP-2000 or a correspondence exam due to the EITC.

Adam13 (talk|edits) said:

18 March 2014
Yes, I am aware of that and documenting it, as well as informing the client. I appreciate the both of you for your help and clarification.

Ckenefick (talk|edits) said:

18 March 2014
Does your software have (at least) two input fields for Line 21: One for (1) Other S/E Income and (2) Other non-SE Income. If you use (2), will that do the trick.

And I'm with K5. Normally, I avoid tax return attachments unless required, since IRS never looks at them. In this case, owing to the EIC claim, you ought to explain yourself if you're taking the position that Sec 131 excludes this income. This way, when the correspondence comes, you can point to the Attachment, that was submitted with the return, to show disclosure, and attach it to the notice as evidence.

One does wonder, how an "employee" can have income reported on a W2 that is excludible from income.

Adam13 (talk|edits) said:

18 March 2014
I agree, this is a wonderfully muddy area, with very little guidance.

Ckenefick, I've not processed any of these, but what about privileged combat pay? Isn't that another instance that fits the bill?

Adam13 (talk|edits) said:

18 March 2014
CK, to answer your other question, I use ProSeries, and it has an exhaustive list of forms that flow to line 21. The only way I see to accomplish this is to input in the system that this came from line 7 of a 1099, but since I don't have an EIN, that's not going to fly.

If you have any clever ideas, I'm game.

Ckenefick (talk|edits) said:

19 March 2014
The only way I see to accomplish this is to input in the system that this came from line 7 of a 1099, but since I don't have an EIN, that's not going to fly.

You can't just put an amount on Line 7 and treat it as S/E Related? (I know, I know what the form instructions say about this...) Lacerte let's you do it, quite easily actually.

Worst case: make up and EIN and paper file?

Regicide9 (talk|edits) said:

23 March 2014
Adam13,

I'm curious..In the W2 your client received, are boxes 2-6 blank? This just popped up in my office a couple days ago -- a taxpayer is being paid by the state to care for a family member, and a W2 was issued for the first time. I'm still digging into Notice 2014-7, but it appears that it may apply directly to my client's situation. The W2 my client received has box 1 wages, Box 16 state wages, and nothing else. Statutory employee box is not marked. EIC is not an issue on this return, however the question still exists whether to take expenses on Sch C, or line 21. Thanks, Regicide9

Adam13 (talk|edits) said:

24 March 2014
Regicide9,

Interesting you ask. I have some illuminating information for all on the issue.

I just got off the phone with Victoria Driscoll, one of the contributing authors to 2014-7. She stated the following:

- The reduction of income is handled on line 21, she said to note "IRS Publication 2014-7" - She mentioned that even though the individual received a W-2, this income is not considered "earned income", particularly in context of the EIC - Upon questioning, and in line with the above two, she indicated the reduction is not a reduction of "earned income" - When this type of income is payment for care of a family member, the correct reporting when done on a W-2, is to not withhold employment taxes (this sounds like your case Regicide)

Finally, she pointed me to a recently published Q&A on the IRS website: http://www.irs.gov/Individuals/Certain-Medicaid-Waiver-Payments-May-Be-Excludable-From-Income

...since the Q&A was published 5 days after my initial posting, I'm now feeling a bit sheepish.

Thanks everyone!

Ckenefick (talk|edits) said:

25 March 2014
She mentioned that even though the individual received a W-2, this income is not considered "earned income", particularly in context of the EIC - Upon questioning, and in line with the above two, she indicated the reduction is not a reduction of "earned income" -

Well, will your software let you do it? Or, will your software consider the W2 income to be "earned income," not let a negative entry on Line 21 change this, and hence flow the W2 through to the EIC calculation? Or, have you figured out an over-ride?

Regicide9 (talk|edits) said:

25 March 2014
Wow. That is exactly what I needed. Thanks Adam!

Adam13 (talk|edits) said:

25 March 2014
Ckenefick, we actually decided to "jimmy" it by reporting on the Schedule C. It's more of an eye-sore, but it had the effect of reducing "earned income", since that's what the software considers W-2 income to be. At least she had a long history of schedule C income in the past. The effect is the same, since the W-2 isn't considered "earned", reducing "earned income" by showing the loss on Schedule C washes that out.

Had I received this information a week earlier, I would have proceeded with line 21 and probably done an override on the forms that feed into the EIC calculation for "earned income" to make sure this was being handled properly. Next year, I will make sure to read up on the Q&A thoroughly before preparing this return. =]

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