1d — Medicaid Waiver Payments Updated for tax year 2025

What this line means

Medicaid waiver payments you received for caring for someone in your home that you are electing to exclude from income. Under IRS Notice 2014-7, certain difficulty-of-care payments are not taxable if the care recipient lives in your home. This line records the excludable amount — you are choosing to treat these payments as nontaxable.

Does this apply to you?

• You receive Medicaid waiver payments for caring for a disabled family member who lives in your home
• You are a home care provider under a state Medicaid program and the person you care for lives with you
• You received a W-2 or 1099 that includes difficulty-of-care payments you want to exclude from income
• You provide in-home supportive services (IHSS) to a household member through a state program

Easy to overlook

You must actively elect the exclusion The exclusion for Medicaid waiver payments is not automatic. If your payments were reported on a W-2, the income is included in Box 1 by default. You need to report the excludable amount on line 1d so it offsets the wages already included on line 1a. Without this step, you pay tax on income the IRS says you do not owe tax on. ¹ [SOURCE: IRS Notice 2014-7 — Difficulty of Care Payments]

The care recipient must live in your home The exclusion only applies when the person receiving care lives in your home. If you provide Medicaid-funded care to someone who lives elsewhere — even a close family member — the payments are taxable income. The living arrangement, not the family relationship, determines whether the exclusion applies. ² [SOURCE: General filing pattern — misreported Medicaid waiver income]

Watch out for this

Including excludable Medicaid waiver payments in your total income without using line 1d to back them out. Many caregivers receive a W-2 with the payments in Box 1 and report the full amount on line 1a without realizing they can exclude the difficulty-of-care portion. This results in overpaying taxes on income the IRS explicitly allows you to exclude.

Related lines on your return

• Line 1a — Form 1040 — W-2 wages where Medicaid waiver payments may already be included
• Line 1z — Form 1040 — Total wages; line 1d reduces this total
• Schedule SE — Form 1040 — Self-employment tax; excluded Medicaid payments also reduce your SE tax base