IHHS Payments and EIC

[BulldogTom]

HSS payments are earned income for Earned Income Tax Credit

May 16, 2019

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The Tax Court has ruled that income that a taxpayer excluded from gross income pursuant to IRS Notice 2014-7, which treats qualified Medicaid waiver payments as excludable as foster care payments, is earned income for the purposes of calculating eligibility under the Earned Income Credit and Additional Child Tax Credit. (Feigh v. Comm. (2019) 152 TC 15)

File amended federal returns for clients who qualify. Although California follows Notice 2014-7, it is unclear if the Tax Court’s decision will impact the California Earned Income Tax Credit because California also requires that the earned income be subject to state withholding. (R&TC §17052(c)(3)(A))

[BulldogTom]

Sorry for the bad formatting above.  I am not good at this fancy dancy cut and paste and I don't do links.

So my question is - the income is still excludible under foster care payments but is includible for EIC calculations?   I think that is what this is saying.

I have a couple of amended returns to get processed.

Tom
Modesto, CA

[Max W]

Yes, according to the court decision, the income is non-taxable, but can be included as Earned Income for both the refundable EITC and the additional (refundable) CTC.

The judged ruled that an IRS notice, can not override a tax credit granted by congress.

https://ustaxcourt.gov/UstcInOp/OpinionViewer.aspx?ID=11863

[BulldogTom]

So now the question is how to make this happen in the ATX software.   

Any suggestions?

Tom
Modesto, CA

[DANRVAN]

6 hours ago, BulldogTom said:

So now the question is how to make this happen in the ATX software.   

Any suggestions?

I have not dealt with this issue but it looks to me like you report wages on line 1 to include as earned income and subtract on line 21 to exclude from taxable income.

However,  IRS might revoke notice 2017-7 to eliminate the double tax benefit that they argued against in Feigh v C.

The court firmly held that that the IRS does not have the authority to deny EIC to the payments IRS excluded under Notice 2017-7.  The judge was critical of the IRS in it's drafting of Notice 2017-7.  The judge stated that Notice 2017-7 contradicted previous court ruling.

While it appears to me that the IRS has no grounds to appeal the Feigh case, it may very well follow the advice hinted by the court and rethink Notice 2017-7.  As the court clearly pointed out the IRS created the double tax advantage and it would be up the IRS fix it.

As far as amending returns to pick up EIC while excluding the payments, as of today that appears to be the law of the land.

[BulldogTom]

Thanks DANRVAN.   I was thinking of something along those lines, but was not sure that would be the way to go about it.

Tom
Modesto, CA

[mwrightea]

If the DHHS in your State issues a W-2 there is a Medicaid waiver option in Box 14 of the W-2.  Once that is selected those wages will appear on Line 7 Earned Income on the EIC schedule of the 1040. 

[BulldogTom]

32 minutes ago, mwrightea said:

If the DHHS in your State issues a W-2 there is a Medicaid waiver option in Box 14 of the W-2.  Once that is selected those wages will appear on Line 7 Earned Income on the EIC schedule of the 1040. 

Thanks.   That is something new to me.

Tom
Modesto, CA

[mwrightea]

Your welcome, I just realized that the Line 7 entry on EIC removes the Medicaid waiver payments from EIC.  Hopefully, ATX will make the corrections on the EIC form for the revenue procedure. 

[BulldogTom]

Got a call today from ATX.   They are looking for the authority to make the IHHS payments eligible for EIC while excluding for Fed Income Tax Purposes.   So they are finally working on the issue of how to enter in ATX.

Tom
Modesto, CA

[BulldogTom]

Got an email from ATX.  They will not do anything for prior years to allow for this change.   They say it will be incorporated into the 2019 software.

Tom
Modesto, CA