Taxes

Family Caregiver Income

The issue of whether or not caregivers, especially family caregivers, are required to pay income tax on compensation received for their services under a Medicaid waiver program comes up frequently. There has been some guidance by the IRS in what is referred to as “difficulty of care” payments but as always, extreme caution should be taken when interpreting IRS documents and knowing which ones are still in effect. We highly recommend you discuss this with a qualified tax accountant or specialist before you take any action.

In 2014 the IRS issued Notice 2014-7. This notice provides that certain payments received by an individual care provider under a state Medicaid Home and Community-Based Services Waiver (Medicaid waiver) program, described in this notice, are difficulty of care payments excludable under § 131 of the Internal Revenue Code. To see the 2014 IRS Notice concerning this matter, click here. We also highly recommend you check out the IRS website that has some Q&As about “difficulty of care” payments under Medicaid waiver programs and potential tax liability here.

In late 2025 the IRS addressed Colorado Community First Choice difficulty of care payment treatment in a private ruling to the Colorado Department of Health Care Policy and Financing. That favorable ruling of income tax exemption can be read here.

Room and Board Income

There is also the question of whether or not room and board received by family members whose loved one with disabilities lives with them are taxed on that income and therefore should report it to the IRS. There appears to be no easy, definitive answer. As above, we highly recommend you discuss this with a qualified tax accountant or specialist before you take any action. In the meantime, there are two documents from third-party sources that have been cited as potential resources. We do not endorse either article or source but this may help you start your research into this question.

One is an article entitled SSI & Parents Paying Taxes on Rent/Room& Board Portion and the other is Why Should a Parent Charge Their Adult Disabled Child Rent? (SSI and ISM and AZ Guardianship). Please note the second article relates to Arizona and may not be applicable to Colorado. In both instances you should ask a qualified tax specialist about your particular situation and if these articles apply.