If you're a parent caring for your adult child with intellectual or developmental disabilities in your home, there's a tax provision you need to know about. IRS Notice 2014-7 allows parents employed as in-home caregivers to exclude qualifying Medicaid waiver payments from their federal income taxes—potentially saving thousands of dollars per year.

At North Star Oregon, we're committed to helping our parent-employees understand and access this benefit. Here's what you need to know.

What Is IRS Notice 2014-7?

In 2014, the IRS extended "difficulty of care" tax treatment—originally designed for foster parents—to caregivers providing services under Medicaid Home and Community-Based Services waiver programs. This means parents who work for disability services providers like North Star can exclude certain payments from their taxable income.

The key word is certain. Not all services qualify, and the rules are specific.

Which Services Qualify?

In-home Attendant Care services qualify when you provide care to your child in the home you share together. This includes:

Assistance with bathing, dressing, toileting, and mobility

Meal preparation and feeding assistance

Medication reminders

Light housekeeping in shared living areas

Shopping and transportation for medical appointments or essential needs

Other activities of daily living performed in the shared home

The Critical Requirements

To qualify for the tax exclusion, you must meet ALL of these conditions:

You and your child live together full-time in the same home

Your child receives services under Oregon's Medicaid waiver program (K Plan or 1915(c) waivers through ODDS)

You provide in-home attendant care services as described in their plan of care

You're paid through the Medicaid waiver program for these specific services

The "same home" requirement is strict. This means:

You share the same primary residence

You don't maintain a separate home where you spend weekends or holidays

You can document the shared living arrangement with matching addresses on IDs, utility bills, etc.

What This Means for Your Taxes

The Income Tax Exclusion

Qualifying Medicaid waiver payments are excluded from federal gross income. This means you don't pay federal income tax on them.

However, you still pay Social Security and Medicare taxes (FICA). When North Star is your employer (as opposed to a consumer-directed arrangement), FICA applies even to excludable income. This is actually beneficial—it means you're earning Social Security credits toward your retirement benefits.

Your W-2 Will Look Different

Your W-2 from North Star will show:

Box 1 (Wages): Only your taxable wages (training, PTO, any non-qualifying services)—excludable attendant care is removed

Box 12 Code II: The amount of excluded Medicaid waiver payments

Boxes 3 & 5 (Social Security/Medicare wages): ALL your wages including excludable payments

Boxes 4 & 6: The FICA taxes actually withheld

The fact that Box 1 is smaller than Boxes 3/5 is correct and expected.

The Earned Income Tax Credit Opportunity

Here's where it gets interesting. A 2019 Tax Court case (Feigh v. Commissioner) ruled that you can have your cake and eat it too: the IRS now allows you to count excluded income toward earned income tax credits (EITC) and additional child tax credit (ACTC) while still excluding it from taxable income.

This "double benefit" can be worth thousands of dollars for qualifying families. You'll want to work with a tax professional to claim this correctly.

What You Need to Do

If you think you qualify, here's your action plan:

Step 1: Verify Your Eligibility

Do you and your child live together full-time?

Does your child receive services under Oregon's Medicaid waiver program?

Are you providing in-home attendant care (not DSA)?

Step 2: Contact North Star's Payroll Team

We'll provide you with:

An attestation form to complete under penalties of perjury

Documentation requirements (matching addresses, etc.)

Information about how your W-2 will be adjusted

Step 3: Keep Records

Maintain proof of shared residence

Keep copies of your signed attestation

Track which hours are attendant care vs. other services

Step 4: Work With a Tax Professional

This is complex tax law. We strongly recommend working with a qualified tax preparer who understands Notice 2014-7, especially if you want to claim EITC benefits.

What Doesn't Qualify

Be clear about what payments cannot be excluded:

Any community-based services provided outside your shared home

Training hours or administrative time

Paid time off or vacation pay

Respite care provided outside your shared home

Any private payments not from Medicaid waiver programs

Common Questions

Q: Can I apply this to previous years?

A: Yes, you can file amended returns for open tax years (generally the past 3 years). Consult a tax professional.

Q: What if my child moves out temporarily?

A: You must notify North Star immediately if living arrangements change. The exclusion applies only during periods of shared residence.

Q: Does this affect my Social Security retirement benefits?

A: No. When North Star is your employer, FICA taxes continue to apply, so you're earning Social Security credits normally.

Q: What if I provide multiple types of services to my child?

A: We'll track your hours separately. Only in-home attendant care hours qualify for exclusion. Any services provided outside the home or other non-qualifying services remain taxable.

Q: Do I still need to report this income anywhere?

A: Yes. It appears on your W-2 in Box 12 Code II, and you'll report it on your tax return with an offsetting adjustment on Schedule 1.

 We believe in supporting the families who provide extraordinary care to their loved ones with disabilities. Helping you access this tax benefit is part of that commitment.

If you're a parent-employee providing in-home care to your child and you think you might qualify, please reach out to our payroll team. We're here to help you navigate this process and ensure you receive the tax treatment you're entitled to under the law.