How to Report Difficulty of Care Payments on Form 1040

To report difficulty of care payments on Form 1040, enter the payment amount on the wage line the IRS expects to see it on, then remove it on Schedule 1, line 8s as a negative number so it drops out of your taxable income. The exact wage line depends on whether the payments arrived on a W-2, a 1099, or no form at all. Done correctly, the IRS sees the income its records show, and your adjusted gross income reflects the exclusion allowed under IRS Notice 2014-7.¹

Confirm the Payments Qualify Before You Exclude Them

The exclusion applies only to payments that meet three tests. The money must come from a state Medicaid Home and Community-Based Services waiver program, not private insurance or family funds. The person you care for must live in your home. And the payments must compensate you for nonmedical support — help with meals, bathing, dressing, or household tasks — provided because of the recipient’s physical, mental, or emotional condition.²³

Being related to the care recipient does not disqualify you.³ Payments for care provided in the recipient’s home rather than yours do not qualify, and neither do payments for services rendered under a state program that isn’t a Medicaid waiver.

Reporting When You Received a W-2

Look at Box 12 of your W-2 first. Many agencies now report excludable Medicaid waiver payments there using Code II, which means they have already kept the excludable amount out of the taxable wages in Box 1.⁴ If you see a Code II amount, enter that amount on Form 1040, line 1d, which is the line specifically designated for Medicaid waiver payments not included in Box 1.⁵

If your W-2 shows the payments lumped into Box 1 as wages with nothing in Box 12, enter the Box 1 amount on Form 1040, line 1a. Some W-2s split the payments across both boxes; in that case, put each figure on its matching line.

Then go to Schedule 1 (Form 1040), line 8s, labeled for nontaxable Medicaid waiver payments. Enter the total excludable amount there as a negative number inside the preprinted parentheses.⁶ That negative offsets what you reported on line 1a or 1d, so the payments never reach your adjusted gross income.

Reporting When You Received a 1099-MISC or 1099-NEC

Some paying agencies treat caregivers as independent contractors and issue a 1099-MISC or 1099-NEC instead of a W-2.¹ If you are not running a caregiving business, enter the 1099 amount on Form 1040, line 1d, then enter the same amount as a negative number on Schedule 1, line 8s.

If you do run a caregiving business as a sole proprietor — for example, an adult day-care with multiple clients — report the income on Schedule C the way you normally would, then enter the excludable portion as an expense in Part V (Other Expenses) and write “Notice 2014-7” next to that line item. Note that when caregiving is your trade or business, you may still owe self-employment tax on the full amount even though the income is excluded from your regular income tax.⁷

Reporting When You Received No Tax Form

If the paying agency did not issue any tax form, tally the payments yourself using bank statements, pay stubs, or records from the state program administrator. Report the total on Form 1040, line 1d, and enter the same figure as a negative on Schedule 1, line 8s. Accuracy matters here because the state program has its own records, and a mismatch can trigger an IRS inquiry.

Electing To Count the Payments as Earned Income

Excluding the payments from gross income also removes them from your earned income, which can shrink or eliminate credits that depend on earned income. The IRS allows a workaround: you can exclude the payments from taxable income and still count them as earned income for the Earned Income Tax Credit and the Additional Child Tax Credit.¹ For 2026, the maximum EITC reaches $8,231 for taxpayers with three or more qualifying children.⁸

Two rules apply if you make this election. You have to include all of your excludable Medicaid waiver payments as earned income for the credit calculation; partial inclusion isn’t allowed. And the payments must be wages or self-employment income to begin with. Counting them as earned income for credit purposes does not make them taxable again.

One longer-term consideration: because excluded payments are pulled out of your taxable wages, they may not generate Social Security credits. Depending on your age, work history, and other earnings, the current tax savings could come at some cost to future Social Security benefits.

Fixing a Prior Year With Form 1040-X

If you paid tax on qualifying difficulty of care payments in a prior year, you can file Form 1040-X to claim a refund. You generally have three years from the date you filed the original return, or two years from the date you paid the tax, whichever is later.⁹

In Part III, explain that the payments are excludable under Notice 2014-7. To speed processing, attach the care recipient’s name (and Social Security number if you have it), documents showing you shared a home during that year — a driver’s license, utility bill, bank statement, or agency letter — and evidence that the recipient was enrolled in a state Medicaid waiver program.¹

Removing the payments changes your adjusted gross income for that year, which can ripple through deductions and credits that were calculated from the original AGI. Recheck the full return before you send the amendment in.

1
Internal Revenue Service. Certain Medicaid Waiver Payments May Be Excludable From Income
2
Office of the Law Revision Counsel. 26 USC 131 – Certain Foster Care Payments
3
Internal Revenue Service. Notice 2014-7
4
Internal Revenue Service. 2026 General Instructions for Forms W-2 and W-3
5
Internal Revenue Service. Form 1040 (2025)
6
Internal Revenue Service. 2025 Schedule 1 (Form 1040)
7
Internal Revenue Service. Family Caregivers and Self-Employment Tax
8
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
9
Internal Revenue Service. Instructions for Form 1040-X