Tax Tips for Paid Family Caregivers in Michigan

If you’re a paid family caregiver through Michigan’s Home Help Program, your earnings
are generally considered taxable income. But there’s a federal provision that could
change that picture dramatically — and most Michigan caregivers don’t know about it.

The Difficulty of Care Exclusion

Under IRS Notice 2014-7, Medicaid waiver payments made to caregivers who live in the
same home as the care recipient may qualify for the “Difficulty of Care” income
exclusion under IRC Section 131. If this exclusion applies, some or all of your Home Help
earnings can be excluded from federal gross income — effectively making them tax-free
at the federal level.

For Michigan families, this exclusion is especially powerful because of two factors. First,
Michigan’s Home Help Program is one of the few that pays spouses as caregivers — and
spouses almost always live with the care recipient, making the exclusion a nearautomatic
fit. Second, many Home Help caregivers in the Detroit area are adult children
who live with the parent they care for, which also qualifies.

A caregiver earning $2,000 per month through Home Help who qualifies for the
exclusion could save thousands of dollars annually in federal income taxes. That’s not a
trivial benefit — for many families, it’s the difference between the caregiver income
being a supplement and being transformative.

How It Works in Practice

Your Home Help earnings are still reported on a W-2 at year end. When you file your tax
return, you report the income and then claim the exclusion, resulting in reduced or zero
federal tax liability on those earnings.

The exclusion doesn’t happen automatically. You (or your tax preparer) must claim it on
your return. In our experience at CareChoice, many caregivers and even some tax
preparers are unfamiliar with this provision. If your tax preparer hasn’t heard of IRS
Notice 2014-7, point them to it — or find one who knows caregiver tax issues.

Michigan State Tax Considerations

The federal exclusion is established by IRS guidance. Michigan state tax treatment may
differ, and you should confirm the state-level implications with a Michiganknowledgeable
tax professional. Do not assume that federal exclusion automatically
means state exclusion.

Social Security Implications

If your earnings are excluded from federal gross income, they may also be excluded
from your Social Security earnings record — meaning they don’t count toward future
Social Security benefits. For caregivers near retirement age, this trade-off (less tax now
vs. lower Social Security later) is worth discussing with a tax professional.

For younger caregivers who expect to return to other employment, the Social Security
impact is typically minimal.

When to Get Professional Help

If you live with the care recipient and want to claim the exclusion, if your tax preparer is
unfamiliar with IRS Notice 2014-7, or if you want to understand the Social Security
trade-off, invest in a tax professional who understands Medicaid waiver caregiver
income. The consultation fee will likely be a fraction of the tax savings.

Questions about getting started as a caregiver? → Contact CareChoice in Detroit

Written by Gary Murray, Chief Marketing Officer | CareChoice