Medicaid Waiver Payments and Taxes: What Every AFH Owner Needs to Know
- Christina Nguyen
- Dec 22, 2025
- 3 min read
Stop Overpaying Taxes by Understanding IRS Notice 2014-7
If you operate an Adult Family Home (AFH), chances are you’ve received Medicaid waiver payments — especially if you serve residents supported by state programs.
But here’s what many AFH owners don’t realize:
Not all Medicaid payments are taxed the same way.
Misunderstanding how these payments work could cost you thousands in overpaid taxes — or create red flags with the IRS.
Let’s break it down in simple terms.
What Are Medicaid Waiver Payments?
Medicaid waiver payments are part of a program that allows individuals with disabilities or elderly residents to receive care in a home or community-based setting rather than an institution.
In Washington and Oregon, many AFH owners receive these payments when:
A resident qualifies for Medicaid support, and
The state reimburses the home through a waiver program
These payments are often called “difficulty-of-care” payments, particularly when the care is provided in the same home where the provider lives.
Are Medicaid Waiver Payments Taxable?
It depends on your setup and where the care is provided.
The IRS allows certain difficulty-of-care payments to be excluded from taxable income, but only under specific conditions outlined in IRS Notice 2014-7.
✅ Nontaxable (Excludable) if:
The care is provided in your personal residence
The resident qualifies for a Medicaid waiver program
Payments are specifically for difficulty-of-care services
❌ Taxable if:
You provide care in a facility you don’t live in
Payments are for standard business or management services
Your setup doesn’t meet the IRS exclusion requirements
Why This Matters
Many AFH owners — and even some tax preparers — report all Medicaid payments as taxable income, when part of it might qualify for exclusion.
That mistake can lead to:
Paying thousands more in unnecessary taxes
Inaccurate Profit & Loss statements, affecting loan and licensing reviews
Missed deductions and overstated income
Possible IRS compliance issues if income is excluded incorrectly
Getting this right is critical — and it starts with accurate bookkeeping.
How It Affects Your Bookkeeping and Reporting
If you receive both taxable and nontaxable payments, your bookkeeping must clearly separate them.
Here’s how:
Categorize income by source and type (waiver vs. private pay)
Maintain documentation showing Medicaid waiver eligibility
Exclude qualified “difficulty-of-care” income properly on your tax return
Keep detailed notes or memos for your accountant explaining the income breakdown
Your tax preparer should be familiar with IRS Notice 2014-7 and how it applies specifically to Adult Family Homes in Washington and Oregon — but unfortunately, most aren’t.
What You Should Do as an AFH Owner
Identify whether your Medicaid payments are waiver-based
Confirm whether you live in the home where care is provided
Separate Medicaid waiver income in your bookkeeping
Work with a tax professional who understands AFH taxation
Review past returns if you think you’ve overreported income — you may be entitled to a refund
Final Thought
You work hard caring for your residents — you deserve to keep as much of your hard-earned income as possible.
Understanding how Medicaid waiver payments are taxed (and when they can be excluded) ensures you stay compliant and don’t overpay.
Need Help Reviewing Your AFH Income and Records?
I specialize in helping Adult Family Home owners in Washington and Oregon correctly report Medicaid waiver income and save thousands through proper tax treatment.
📱 Call Christina at 564.888.1687
📧 Email: christina@acuitytaxgroup.com
Let’s make sure your AFH income is reported correctly — so you keep more of what you earn and avoid IRS stress later.