Cathy Ellorin has been taking care of people her whole life.
She started as a flight attendant in the late 1970s, a job that took her “everywhere,” she said. But in 2001 she quit to take care of her daughter full time.
Her daughter, now 19, has cerebral palsy. Ellorin, a single parent, washes and feeds her, makes doctor appointments and takes her to therapeutic programs. But the biggest part of the job, she said, “is keeping the person safe.”
Another challenge for the last two years has been figuring out the complex income tax rules that apply to her. During that time, it’s possible thousands of care providers, many of them living on limited incomes, paid taxes they shouldn’t have. Others might find they now owe money to the government.
Ellorin is employed under In-Home Supportive Services, or IHSS, a state program that pays for care provided in an elderly or disabled person’s home, rather than at a nursing home or care facility.
California has as many as 400,000 IHSS care providers, and when the Internal Revenue Service changed its taxable income regulations in 2014 it threw about half of them into tax limbo. The IRS recently addressed that uncertainty and charged Californians $28,000 for the answer, but many caregivers still could be unclear about the rules.
One accountant, who had disagreed with California’s interpretation of the rule, got clients tax refunds of about $5,000 a year.
Put on notice
The IRS changed its guideline in January 2014 with the simply named Notice 2014-7.
In an FAQ accompanying the notice, the IRS said “qualified Medicaid waiver payments” — the sort of payments Ellorin receives — are “excludable from gross income.” That notice was limited to cases where the care recipient and the care provider live together, whether they are related or not.
Ellorin and her daughter live together, so the notice meant the federal government would not take any taxes from her wages. However, that wasn’t clear to many taxpayers until the IRS issued a clarifying letter this month.
Ellorin, who lives in Bonita, first heard about the change in 2014 in an email from “one of our resource teachers at the Sweetwater Unified School District.”
“That prompted me to figure out what was going on,” she said. “And it’s taken about two years.”
During that time, Ellorin said she has been paying taxes on the income she receives for taking care of her daughter. In San Diego County, the care workers make $9.85 an hour. Wages vary by county, from the state minimum wage of $9 an hour in some places to $12.85 in Santa Clara County.
Kristina Bas-Hamilton, legislative director for the United Domestic Workers, also heard about the change in 2014. She said union members started asking about it, and she started doing some research.
Eventually, she found Notice 2014-7.
“It was unclear to me, just based on what I was reading, whether it really impacted IHSS or not because the notice was very specific to waiver programs,” Bas-Hamilton said.
The question: How narrow or broadly should the IRS notice be interpreted?
“We heard a lot of frustrated people who just were either getting conflicting advice from their accountant, some members contacting us saying that the accountants knew nothing of the issue,” or, Bas-Hamilton said, being asked by accountants to sign statements shielding them from liability “if it turned out that the advice that they were getting was wrong.”
What’s in a waiver?
The disagreement comes down to the definition of California’s In-Home Supportive Services program.
In its Notice 2014-7, the IRS said the tax change applied to “qualified Medicaid waiver payments,” administered by a state, a state subdivision or a “certified Medicaid provider.”
According to Michael Weston, a spokesman for the California Department of Social Services, IHSS is not a Medicaid waiver program. It’s a “Medicaid state plan program.”
That could be interpreted to mean that individuals under IHSS weren’t eligible for a tax break meant specifically for Medicaid waiver program recipients.
In fact, in January 2015, the Social Services Department issued an e-note that seemed to solidify that interpretation.
Less than a month later, the IRS published a new series of FAQs about Notice 2014-7.
The first question was about this exact issue. If an individual receives “payments under a state Medicaid program other than” the specific Medicaid waiver program, does the tax break still apply?
The IRS’s answer: It depends on the “nature of the payments and the purpose and design of the program.”
That opens the door to the interpretation that what matters is that the program does what the IRS had in mind with Notice 2014-7: pay a care provider that lives with the care recipient for support services.
With those seemingly competing state and federal interpretations, the question remained unanswered.
“It was very, very frustrating because it’s like that carrot up there,” Ellorin said. “It’s dangling. It’s like, OK, we know that this is the law, but nobody is giving us information and how do we do it. How do we proceed accordingly?”
The $5,000 question
At least one tax preparer had an interpretation that differed from the state’s.
Regina Levy is a certified public accountant in Los Angeles with about 30 years of experience.
“I have a background in special needs because my own daughter has struggled with autism, and my clientele is primarily in the special needs community,” she said.
Levy said the e-note that the Social Services Department issued in 2015 said the tax break didn’t apply to IHSS payments “under a very narrow interpretation.”
“That’s not how I interpreted the notice (from the IRS),” she said.
Levy has been filing amended tax returns with that interpretation, getting her clients refunds “averaging about $5,000 per year, per family.”
Still, the state wanted the IRS to weigh in definitively, although it would cost taxpayers $28,300.
The IRS finally issued a letter in response this month. In it, the agency went back to the FAQ it published in February 2015 and found that IHSS payments are “excludable from the gross income of the provider.”
Ellorin said she was elated when she saw the letter and finally had clarity.
“I think that it takes (out) the stress for the providers now that they don’t have to do their search and figure it out themselves,” she said.
However, the new ruling might not mean a change for some IHSS providers in the state, because they hadn’t been paying taxes on that income anyway.
Not only did tax preparers not know how to interpret the law, Ellorin said people she talked to were being paid under conflicting interpretations of the law.
“My timesheets indicate taxes taken out,” she said. “But I have seen other providers, they have — they were very nice to show me their pay sheets, which I showed to the union — zero. Zero taken out.”
Ellorin said no one knew why certain providers were getting the tax break on their pay sheets and some were not.
They were “saying to us, ‘Well, we don’t know what to tell you, Cathy, but we don’t have any taxes taken out, sorry!’” she said. The ones still paying federal taxes “are like ‘I don’t understand why this is happening.’”
Asked if it were possible some providers in California had no federal income tax withheld from their paychecks, Michael Weston from the Social Services Department simply said in an email, “No.”
‘Cuts both ways’
Still, everyone seemed happy to have final guidance from the IRS. Levy said the notice confirmed her interpretation of Notice 2014-7.
However, she warned that a tax situation still exists that could require some caregivers to pay back some money to the government — those who collected the earned income tax credit during 2014 and 2015.
“If they reported that income as taxable, they will have to amend and they will have to refund the IRS the (earned income tax credit) because it was granted on income that was excluded from income tax,” she said.
Bas-Hamilton with the United Domestic Workers said the ruling “actually cuts both ways” depending on each individual’s financial situation.
“If you receive this (earned income tax credit) in the past years and now you’re being told that you can’t get it anymore, that’s again, thousands of dollars in pay for folk who pretty much live paycheck to paycheck,” she said.
Ellorin plans to file amended tax returns now that she has the IRS ruling. But even she doesn’t know what this means for her finances.
“I really couldn’t tell you that because being a single parent with my daughter as a dependent, disabled dependent, I file for the earned income tax credit,” she said. “So I don’t know.”
