Special Needs Trusts

COPES Caregiver Payments and Federal Income Tax Exclusion

The IRS will now consider payments to certain individual care providers under the COPES Medicaid waiver program as “difficulty of care” payments excluded from federal income tax.  The exclusion applies when a care recipient resides in an individual care provider’s home, regardless of whether the care provider is related or unrelated to the eligible individual. Income is excluded for providers caring for as many as 10 eligible individuals under age 19 or five eligible individuals who are age 19 or over.

Medicaid waiver services include personal care services, habilitation services, and other services that are “cost effective and necessary to avoid institutionalization.”    It is important to note that personal care services do not include skilled services that only a health professional can perform.

The IRS has broadly interpreted the definition of “foster home” and “difficulty of care” payments under § 131(c) of the I.R.C.   A “foster home” will now include a “family home” setting where an eligible individual gets care under a Medicaid waiver program and resides in the caregiver’s home.  “Difficulty of care payments” now include Medicaid waiver payments because, like foster care payments, the waivers provide the additional care needed for a qualified individual with physical, mental, or emotional handicaps to stay in a home setting.  The policy behind this expanded interpretation is that both Medicaid waiver and foster care programs share the objective of enabling individuals who would otherwise be institutionalized to live in a family home setting by paying resident caregivers for the additional care requirements.

The scope of this IRS notice is limited and does not address whether qualified Medicaid waiver payments are subject to tax under the Federal Insurance Contributions Act (FICA) or the Federal Unemployment Tax Act (FUTA).  Taxpayers may apply this notice for a claim for credit or refund for returns predating January 3, 2014 up to the later of 3 years from the date of filing or 2 years from the date of payment of the tax.

See: Internal Revenue Bulletin 2014-4; Notice 2014-7



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