TAXABILITY OF SOCIAL SECURITY BENEFITS
Social Security benefits have the possibility of becoming taxable income. This applies to benefits [not Supplemental Security Income (“SSI”)] received by retired persons, disabled workers, disabled adult children, survivors of deceased workers, or spouses of beneficiaries. In specific terms, up to 50% of Social Security benefits could become taxable if combined with other income, such as bank interest, annuities, private pensions, wages, et cetera, and the total is more than an adjusted base amount ($25,000 single; $32,000 married filing jointly).
A married couple whose “combined income” is more than $44,000 and single persons with income over $34,000 will pay income tax on up to 85% of their Social Security benefits.
The “combined income” mentioned above is an individual’s or married couple’s adjusted gross income as reported on the IRS Form 1040, plus one-half (50%) of the total Social Security benefits received for the year, plus non-taxable interest.
For beneficiaries whose income is below either the $25,000 or $32,000 levels during 2019, Social Security benefits are not taxed. (§716 – 2020 U.S. Master Tax Guide)
This provision will not affect persons receiving Supplemental Security Income (SSI) benefits or those receiving both SSI and Social Security checks, since substantial outside income will terminate eligibility for SSI benefits long before income levels became taxable (IRS Notice 703, August 1984).
Recipients of Social Security benefits will receive a yearly statement showing the sum of all benefits received during the year. This statement may then be used when figuring taxable income on the worksheet the Social Security Administration will enclose with its mailing.
Any questions should be directed to a qualified tax advisor.
PAYMENTS FROM THE MICHIGAN D.H.H.S.
A. GA, ADC, ENP, SNAP
Someone who experiences a disability may be receiving payments via what is known as a “Bridge Card” from Michigan’s “Department of Health and Human Services” (DHHS) under General Assistance (GA), Aid to Dependent Children (ADC), Emergency Needs Program (ENP), or the Supplemental Nutrition Assistance Program [(SNAP); a.k.a., “food stamps”], among others. NONE of these payments are considered taxable (gross) income to the person with a disability, even if the checks come to a parent or other person as payee on behalf of the person with a disability.
The federal government will consider these payments as OUTSIDE SUPPORT for purposes of determining whether parents or another person can claim the person with a disability as a dependent. As with SSI, if a parent or anyone else provides more financial support than the yearly total of any DHHS payment(s) and all other dependency tests are met, then the parent or other person may claim the DHHS payment recipient as a dependent.
B. Independent Living Services Program (Formerly, “Adult Home Help” or “Chore”)
NOTE: AHHS payments are no longer considered taxable income for live-in parent-caregiver providers of such services. The IRS changed its position at the beginning of 2014.
Independent Living Services Program ("ILSP") or Adult Home Help Services (“AHHS”) payments are provided through the Michigan Department of Health and Human Services (“DHHS”) to persons who deliver unskilled and non-specialized service or personal care activities essential to a person with a disabling condition who cannot perform such things without assistance. The goal of the AHHS program is to maintain the person with the disability in his/her natural home instead of in a costlier alternative residential care arrangement.
These “personal care services” are defined by the Centers for Medicare and Medicaid Services (CMS) as: assistance with eating, bathing, dressing, toileting, transferring, maintaining continence, personal hygiene, light housework, laundry, meal preparation, transportation, grocery shopping, using the telephone, medication management, and money management. Most of these personal care services are also found in the listing of “chores” under Michigan’s AHHS rules contained within the DHHS “Adult Services Manual” at §101.
The local area Internal Revenue Service (“IRS”) policy-position until tax year 1990 was that parents could exclude AHHS payments from their gross income each year. However, that stance was eventually reversed by the IRS national office because of a contrary decision from the U.S. Tax Court. In Bannon v. Commissioner of Internal Revenue, 99 T.C. No. 3, Docket No. 26900-90 (July 20, 1992), Dorothy Bannon lost her bid to have AHHS payments declared non-taxable income to a parent or relative caregiver. The Tax Court held that under California law, Ms. Bannon’s daughter was a welfare recipient under that state’s version of AHHS and was “...intended to be the ultimate beneficiary...” of the welfare payments. The parent in this case was employed by her daughter to provide supportive services. Therefore, the AHHS payments were includable in the parent’s income for federal income tax purposes.
On January 3, 2014, the IRS issued its “Notice 2014-7” addressing the income tax treatment of certain payments to an individual care provider under a state Home and Community-Based Waiver (Medicaid Waiver) program. The notice provides that the IRS will treat “qualified Medicaid Waiver payments” as “difficulty-of-care” payments excludable from gross income under §131 of the Internal Revenue Code. (see also: §883 – 2020 U.S. Master Tax Guide) Accordingly, the IRS stated that it will no longer assert the position of its own “Program Manager Technical Advice” memorandum (PMTA 2010-007) where it held that “a biological parent of a disabled child may not exclude payments under §131 because the ordinary meaning of foster care excludes care by a biological parent.” For purposes of IRS Notice 2014-7, qualified Medicaid Waiver payments are those issued by a state, a political subdivision of a state, or a certified Medicaid provider under a Medicaid Waiver program to an individual care provider for non-medical support services provided under a plan of care to an individual (whether related or unrelated) living in the individual care provider’s home. (see IRS FAQ’s at: https://www.irs.gov/individuals/certain-medicaid-waiver-payments-may-be-excludable-from-income)
IMPORTANT NOTE: although the IRS Notice 2014-7 primarily involves the Medicaid Waiver program, it also clearly states that the IRS would no longer apply §131 to the 1992 Bannon case decision, which dealt exclusively with the income taxability of AHHS payments.
The following is how a parent (or other) live-in caregiver must account on their federal IRS Form 1040 (see: IRS 1040, 2019 Instructions, page 84; or IRS Pub. 525) for the funds from the Michigan W-2 that is received each year from the DHHS for AHHS payments:
If you received such payments (including AHHS) described in IRS Notice 2014-7 in an earlier year, you may file an amended return via IRS Form 1040X to exclude the payments from gross income. Generally, for a credit or refund, you must file an amended return within 3 years 22 (including extensions) [4 years for Michigan returns] after the date you filed your original return or within 2 years after the date you paid the tax, whichever is later. (see: IRS 1040x Instruction booklet; IRC §6511; and, https://www.irs.gov/individuals/certain-medicaid-waiver-paymentsmay-be-excludable-from-income)
IRS Notice 2014-7 does not address whether qualified Medicaid Waiver (and/or AHHS) payments excluded from income under this IRS Notice may be subject to tax under the Federal Insurance Contributions Act (FICA) or the Federal Unemployment Tax Act (FUTA) in certain circumstances. There appears to be an arguable position about whether a parent who is the provider/caregiver must pay the FICA at all. In the Federal Tax Advisor; Section 58,655; 1992, Commerce Clearing House, Inc., it states:
“… services performed by a parent for a child generally are covered employment for FICA purposes and are subject to withholding. However, an exception is provided for domestic services performed by a parent. That is, in most cases, a parent performing services of a household nature in the private home of a son or daughter will not be engaged in covered employment under FICA and will be exempt from withholding."
On a related area, the same section of the Federal Tax Advisor goes on to state:
“… services performed by an individual for a son, daughter, husband or wife, and services performed by a child under the age of 21 in the employ of a parent, are specifically excluded from the statutory definition of “ employment" under FUTA [("Federal Unemployment Tax Act")].”
The FICA and FUTA issues are rather complex and the taxpayer is strongly advised to seek professional assistance for individual situations.
Finally, it is important to keep in mind that AHHS payments remain income taxable to third party caregivers, that is, those who live elsewhere but provide these chore services at the home of the individual with special needs.
FAMILY SUPPORT SUBSIDY (Michigan)
Since 1984, Michigan has had a Family Support Subsidy program that provides monthly payments to qualified families. These are families that have a member who is a special education student with the educational label of either a Cognitive Impairment – Severe (CI-S), Severe Multiple Impairment (SXI) or Autism Spectrum Disorder (ASD) and have a taxable income of less than $60,000 on their state of Michigan tax return. Please also note that children with ASD must be receiving special education services in a program that qualifies under the Family Support Subsidy law.
Family Support Subsidy payments ($229.31 per month; increased from $222.11 on 10/1/2018) are not counted as income for any programs administered by the Michigan Department of Health and Human Services (GA, ADC, ENP, SNAP, etc.), the federal SSI Program, or Michigan Children’s Special Health Care Services. Family Support Subsidy payments are also considered non-taxable to parents for both federal and Michigan state income tax purposes. This non-taxability situation results from the payments being considered as those made by a governmental unit. (Michigan Mental Health Code, R330.1611)
Note:During the 2016 Michigan legislative year, no bill was introduced that would expand the coverage beyond those children
having the special educational labels of Cognitive Impairment – Severe (CI-S), Severe Multiple Impairment (SXI), or Autism
Spectrum Disorder (ASD).
This info comes from:
Any questions should be directed to a qualified tax advisor.