Here’s the most valuable sentence in Michigan caregiving that almost nobody explains properly: if you live in the same home as the person you’re paid to care for through Home Help, your caregiver income may be entirely excludable from federal income tax. The authority is IRS Notice 2014-7, which treats qualifying Medicaid personal-care payments as “difficulty of care” payments — and it can raise the effective value of the $17.13/hour rate by a meaningful margin.
This guide explains who qualifies, how to claim it, and the traps. One disclaimer that isn’t boilerplate: taxes are individual — confirm your specific situation with a tax professional. This article is education, not tax advice.
At a Glance
– IRS Notice 2014-7 lets caregivers exclude Medicaid waiver/personal-care payments from federal gross income when the caregiver and care recipient live in the same home.
– Live apart? The exclusion generally does not apply — your pay is ordinary taxable income.
– You may still receive a W-2 showing wages; there’s a standard way to report and then back the income out on your return.
– Since a 2019 Tax Court decision (Feigh), many caregivers can choose to count excluded pay as earned income for the Earned Income Tax Credit — sometimes the best of both worlds.
– Michigan income tax starts from federal AGI, so the federal exclusion generally flows through to your state return.
What Notice 2014-7 Actually Says
In 2014, the IRS announced it would treat certain payments under Medicaid home- and community-based programs as difficulty of care payments under Section 131 of the tax code — the same section that makes foster-care payments non-taxable. The theory: when the government pays someone to provide care in the caregiver’s own home instead of institutionalizing the recipient, that payment is support for the care arrangement, not ordinary wages.
The operative condition is the shared home. An adult daughter living with her mother and paid through Home Help typically fits. The same daughter driving over from across town, paid for the same care, typically does not.
How to Claim the Exclusion
The mechanics trip people up because the paperwork often doesn’t match the tax treatment:
- You may still get a W-2 (or other statement) reporting your Home Help pay as wages, because payors don’t always adjust for 2014-7.
- On your federal return, the standard approach is to report the income where the form puts it, then subtract it back out as a Notice 2014-7 exclusion (current IRS instructions describe entering the excluded amount as a negative adjustment on Schedule 1). Tax software handles this if you tell it the income qualifies under 2014-7.
- Keep proof of shared residence — IDs, mail, lease/deed showing both of you at the address — in case of questions.
If a prior year’s return paid tax on income that qualified, an amended return can often recover it — generally within the standard three-year window.
The EITC Wrinkle (Often Worth Real Money)
For years, excluding the income had a downside: it disappeared from “earned income,” shrinking or eliminating the Earned Income Tax Credit for lower-income caregivers. The Tax Court’s Feigh decision changed the landscape: caregivers may elect to include 2014-7 payments as earned income for EITC purposes while still excluding them from taxable income. For a caregiver with kids at home, running the return both ways can swing the refund by thousands. This is precisely the calculation worth paying a preparer for one hour to get right.
What About Social Security and Medicare Taxes?
Income-tax exclusion is separate from FICA. Whether Social Security and Medicare taxes apply to your caregiver pay depends on how the payment relationship is structured (and family-employment rules can create their own exceptions). This matters long-term: FICA-exempt years don’t build Social Security credits. Ask your preparer how your specific arrangement is treated and what it means for your future benefits — it’s the least-asked, most-important question in this whole topic.
Key Takeaway: Live-in caregivers should never simply pay full tax on Home Help income by default, and non-live-in caregivers should never assume they’re exempt. One hour with a preparer who knows Notice 2014-7 routinely pays for itself many times over.
Frequently Asked Questions
Does the exclusion apply if we live apart?
Generally no — the shared-home requirement is the core of the rule. Your pay is then ordinary taxable income, though normal credits and deductions still apply. See also whether caregiver pay counts as income for benefits.
Will excluding it hurt my Social Security record?
The income-tax exclusion itself is separate from FICA; what builds (or doesn’t build) your Social Security record is whether FICA was paid on the wages. Ask your preparer about your specific setup.
Does Michigan tax the income if the IRS doesn’t?
Michigan’s return starts from federal AGI, so income properly excluded federally generally isn’t taxed by Michigan either.
Does this affect Medicaid or food assistance eligibility for my own household?
Different programs count income differently — tax-excluded is not automatically benefits-excluded. How caregiver pay interacts with benefits.
What to Do Next
If you’re already enrolled, gather your pay statements and residence proof before tax season. If you’re not enrolled yet, the tax treatment is one more reason the program is worth two minutes: check your eligibility free.