2014-7 Difficulty of Care Payments

Question

Hello,

I have three W2 all Difficulty of Care Payments

1-Box 1 zero, Boxes 3,4,5,6 SSWages, Medicare Wages, SS Wages withheld, Medicare Wages withheld. Box 12A Gross 401K withheld, Box 14 FLI,NJUI, WF, SW.  No State Taxes deducted.

2-Box 1 $465, Box 2 $9.38, Box 12A code II $5,745.00, Box 16 $465, Box 17 $5.82.

3-Box 1 zero, Box 12A code II $300 (this is total income earned).  No State Taxes deducted.

The first W2 is the only Medicare, SS deduction.  Can I just claim W2 number 1 OR do I have to claim all three W2?

Also, any tips on how I enter all three to maximize return, claim earned income credit, and show work history that will go to Social Security records?

Thank you!

JanaA · Answer

Hello Getitdone! Great follow-up questions. Let me address each one.

For W-2 #1 (Box 1 entered as $1 for NJ): The "Other Income" Medicaid Waiver Payments section is the right place to make the election to include these payments as earned income for the EITC. You would enter the total amount of the waiver payments you want counted as earned income. This would be the SS/Medicare wages shown on that W-2. The $1 you entered in Box 1 is just a workaround for the NJ requirement and does not need to be added separately.

For W-2 #2 and W-2 #3 (Box 12, Code II): Since you entered those amounts directly in the W-2 screen under Box 12 with Code II, the software automatically handles the exclusion from taxable income. You should not re-enter those amounts in the "Other Income" section.

Getitdone · Answer

Thank you very much for your answer.

I just need a little more clarification:

When I enter the information for W2 #1 in it tells me that for New Jersey I can not have zero for Federal and to input $1 which I did.  Then I did go to the "Other Income" screen and typed in the entire amount that was SS Wages/Medicare Wages plus $1.  Is that right?

Regarding W2 #2 since Box 12 A code II automatically deducts the amount then I would not need to include in "Other Income" or do I at least add the $465 to the amount in #1?

Regarding W2 #3 since Box 12 A code II  same question as above do I add this to "Other Income" or it automatically adds it?  For this one too I needed to report $1 since I'm in NJ.

Thank you!!!!

MatthewD · Answer

Hi Getitdone,

Thank you for reaching out. This is a great set of questions, and I'm happy to help. You cannot report a W-2 that does not have an amount in box 1.  Only report the W-2 with an amount in box 1.

W-2 #2 (Box 1 = $465, Box 12 code II = $5,745):

Enter the W-2 as shown. The $465 in Box 1 is taxable wages. The $5,745 in Box 12 with code II represents Medicaid waiver/difficulty of care payments, which are generally excludable from income tax under IRS Notice 2014-7. Our software recognizes code II and handles this automatically.

For the Earned Income Credit (EITC):

Even though the difficulty of care payments are excluded from taxable income, the IRS allows you to elect to include them as earned income for purposes of calculating the EITC. In FreeTaxUSA, go to the Other Income screen and look for the "Medicaid Waiver Payments to Care Provider" section. There you can make the election to include these payments in your earned income calculation. The IRS confirms this at https://www.irs.gov/individuals/certain-medicaid-waiver-payments-may-be-excludable-from-income.

One important note: the Notice 2014-7 exclusion only applies to income tax. It does not cover Social Security and Medicare (FICA) taxes. The FICA withholdings on W-2 #1 are separate and are not affected by the exclusion.