IRS Offers a Tax-Break for In-Home Care Providers Who Live in Their Client’s Homes

It is a commonly known fact that in the United States, the IRS and its tax laws are among the most complex in the world. For most Americans, hiring a tax expert has almost become a necessity. If an individual works in the home health care field and has done so for more than four years, he or she is probably used to paying income taxes on his or her earnings. But according to IRS Notice 2014-7, some or all of the individual’s income may not be subject to federal income tax.

 What Does This Rule Entail?

This rule went into effect back on January 3, 2014, but since its inception, there has been no shortage of confusion surrounding it, with some home healthcare providers going so far as to say they do not want this tax exemption.

The new rule applies to state Medicaid and Community Based waiver programs, also known in California as the In-Home Supportive Services or IHSS.  This service provides paid in-home health care services to those who are blind, disabled, or low-income elderly right in the privacy of their own homes. It is designed to provide sufficient in-home care to enable the person to remain living independently in their own home instead of ending up in a nursing home or other form of assisted living facility.

For tax purposes, the IRS sends these individuals a W2 form each year; however, according to the IRS, the person being cared for is the caregiver’s employer. Until IRS Note 2014-7 went into effect in January of 2014, this income was considered taxable.

 The Big Change

Under 2014-7, if all or part of the caregiver’s income is earned while they are living in their client’s home on a full-time basis, it is not taxable. Conversely, if the caregiver does not live in the same home as their client, then their income is still considered taxable. This tax rule applies not only to professional caregivers but to those who are related and are living full-time in their loved one’s home.

At first, this new rule went relatively unnoticed by tax pros as the rule surfaced after the 2014 tax software they used had already been completed and was in full use. It did, however, raise a lot of questions in the following year, prompting the IRS to publish a Q&A page in February 2015.

Not Such Good News

One might think that making it possible for caregivers to avoid paying taxes on their income would make everyone happy, and it does bring a smile to the faces of those who are making a significant income. But one significant problem exists. A large percentage of in-home caregivers have an income that is so sufficiently low that they do not have to pay income taxes anyway.

So, how does this affect them in a negative way? If an individual’s income is below a certain threshold and he or she does not have to pay taxes, that individual may not be eligible for the Earned Income Credits. Since this credit is significantly higher than any taxes the person might owe, this new rule means many low-income caregivers no longer qualify for the Earned Income Credits, potentially costing them thousands of dollars in tax refunds.

Therefore, if an individual works in the in-home care field and receives payments via the IHSS while living full time in his or her client’s home, he or she may be eligible for this exemption. The best to find out is to be diligent and speak to a tax professional who can take a look at each specific situation, rightfully determine eligibility, and can provide the best tax help services.

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