Newsletters

Happy New Year! 

Following is an update of a few of the new 2018 tax law changes.  In addition, our website contains about 90 financial calculators, along with a number of financial and tax links including IRS and WI/IL Dept of Revenue websites.  This site is packed with lots of information that will be helpful for both tax information and planning.  If you are a returning client and would like a personalized client organizer for tax planning, request one via email at wendy@carefreetax1040.com.  An organizer is also on the website under the info center tab.  Call 608-756-9930 to set up your appointment. 

We hope 2018 was a year full of blessings to you and your loved ones.  Looking forward to seeing you soon! 

Wendy and Robin

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Identity Theft

IRS Identity Verification.  If you have had a breach of identity with a 2017 filed tax return, you should be receiving an IRS letter with an IP PIN number that is required to file your return.  Be sure to bring that to your appointment.  You will receive a new number every year. 

Phishing Warning! –A law was enacted in 2017 to allow 4 private debt collection services to collect taxes from older accounts.  A person will receive a letter from both the IRS and the private debt collection service. Please verify this by calling the IRS if you have any questions on past due IRS balances.  The debt services may call people (and I know this is confusing because the IRS won’t), but neither the debt service nor the IRS will ask for credit card payments, wire transfer, or debit/ITunes card payments. There continues to be a variety of phone, email, and snail mail scams demanding payment.  A caller will ask you to verify personal information, and then threaten to sue, put you in jail, etc.  As far as the IRS goes, they only contact people by mail – not by phone – about unpaid taxes.  The scammers are now creating letters that look like legitimate IRS letters.  If you receive a letter and it doesn't make sense to you, bring it into the office. Also, be alert for email scams that use the IRS name and ask for personal or financial information. Never open up an email from the IRS, as there may be a virus attached.  Forward all scam emails to phishing@irs.gov.  If you get a scamming letter or phone call, call 800-366-4484.  The scammers cannot be caught unless the calls are reported.  These scammers have stolen millions of dollars from people, especially the elderly.

New Tax Laws  

FORMS. 1040A, 1040EZ, WI forms 1-A and WI-Z forms are now eliminated.  All returns will be filed on 1040 and WI form 1.

Tax Rate Changes. There is still a 7-bracket structure with lower rates for most taxpayers.  Most dropped by 3-4%. Under these changes, the marriage penalty is also gone for most taxpayers.

Standard Deduction Increased.  For tax years 2018-2025, the standard deduction is increased to $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other taxpayers, adjusted for inflation in tax years beginning after 2018.

***NEW: Even if you think you will not itemize your deductions for federal tax purposes, bring in your receipts, including charitable contributions, because it may be useful for WI tax purposes.

Personal Exemptions Suspended.  For tax years 2018-2025 the deduction for personal exemptions is suspended by reducing the exemption amount to zero.

Head of Household.  The IRS may be requiring documentation for this filing status and more audits will take place. Answers to specific questions must be recorded this year when filing your return.

Child Tax Credit Increased.  In an effort to make up for the loss of the personal exemptions for tax years 2018-2025, the child tax credit is increased to $2,000. The income levels at which the credit phases out are increased from $110,000 to $400,000 for married taxpayers filing jointly and from $75,000 to $200,000 for all other taxpayers.  This, along with increase refundability amounts ($1400 from $1000), will allow many more families to claim the credit.

Non-child dependent credit. A $500 nonrefundable credit is provided for dependent children over 16 years of age, as well as other adult dependents.

2018 Old Law/2019 New Law:  Beginning in 2019, the amount of the individual shared responsibility payment/penalty for not having health insurance is reduced to zero. Taxpayers still need to have health insurance coverage or show an exemption for 2018.  Beginning in 2019, this requirement is eliminated.

Deduction for Personal Casualty & Theft Losses Suspended.  For tax years 2018-2025, the personal casualty and theft loss deduction is suspended, except for personal casualty losses incurred in a Federally-declared disaster area.

Expanded Use of 529 Account Funds.  For distributions beginning in 2018, “qualified higher education expenses” include tuition at an elementary or secondary public, private, or religious school, as well as tutoring in K-12, up to a $10,000 limit per tax year. Homeschooling costs are not included. The WI private school subtraction cannot be used if the funds to pay were taken from a 529 Plan. 

Moving Expenses Deduction Suspended.  For tax years 2018-2025, the deduction for moving expenses is suspended, except for members of the Armed Forces on active duty who move pursuant to a military order and incident to a permanent change of station.

State and Local Tax Deduction Limited.  For tax years 2018-2025, a taxpayer may claim an itemized deduction of up to $10,000 ($5,000 for a married taxpayer filing separately) for total of State income tax and local property taxes. Foreign real property taxes may not be deducted.

Property Tax Bill. Check your personal residence property tax bill to verify you have the lottery credit applied on it.

Home Equity Indebtedness Interest Deduction.  For tax years 2018-2025, the deduction for interest on home equity indebtedness is suspended.

Mortgage Interest Deduction. For tax years 2018-2025, the deduction for mortgage interest is limited to original loan amount of indebtedness of up to $750,000 ($375,000 for married taxpayers filing separately).

Mortgage Insurance Premiums (PMI) has been extended for the 2018 tax year.

Medical Expense Deduction. For tax year 2018, the threshold on medical expense deductions is reduced to 7.5% of adjusted gross income for all taxpayers. In 2019, the threshold is scheduled to return to 10%.

Meals and Entertainment Expense.  Beginning in tax year 2018, entertainment expense is no longer allowed as a business deduction.  Meals are still allowed, limited to 50%. Meals provided by an employer is reduced from a 100% to a 50% deduction.

Miscellaneous Itemized Deductions Suspended.  For tax years 2018-2025, the deduction for miscellaneous itemized deductions that are subject to the 2% floor are suspended. These include unreimbursed employee business expenses, mileage, tax preparation fees, investment fees, job hunting expenses, etc.

AMT exemption amounts for higher-income earners significantly increased, as previously it was not adjusted for the inflation.  That change is now permanent.

Gambling Loss Limitation.  For tax years 2018-2025, the limitation on wagering losses is modified to provide that all deductions for expenses incurred in carrying out wagering transactions, and not just gambling losses, are limited to the extent of gambling winnings.  The losses are still reported as an itemized deduction.

Kiddie Tax Modified.  For tax years beginning in 2018, the taxable income of a child attributable to earned income is taxed under the rates for single individuals, and taxable income of a child attributable to net unearned income is taxed according to the brackets applicable to trusts and estates.

Alimony.  For any divorce or separation agreement executed beginning in 2019, or executed before that date but modified after it, alimony and separate maintenance payments are not deductible by the payor spouse and are not included in the income of the payee spouse. For those taxpayers who were divorced before January 1, 2019, the old rules will still apply where alimony is deductible by the payor spouse and taxable by the payee spouse.

Additional Information

Standard Mileage Rate.  Taxpayers can use the standard mileage rate (in lieu of actual expenses) in computing the deductible costs of operating automobiles owned or leased by them for self-employment purposes. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for business travel.   The following rates are applicable for the 2018 tax year: Business - $.545, Medical - $.18,    Charitable  -  $.14.

Deduction for Pass-through Income. Generally, for tax years 2018-2025, the TCJA added a new section, Code Sec. 199A, “Qualified Business Income,” under which a non-corporate taxpayer, including a trust or estate, who has qualified business income (QBI) from a partnership, S corporation, or sole proprietorship may be entitled to a deduction of up to 20% of their QBI.

For 2018, if taxable income exceeds $315,000 for a married couple filing jointly, or $157,500 for all other taxpayers, the deduction may be limited based on whether the taxpayer is engaged in a service-type trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as machinery and equipment) held by the trade or business. The limitations are phased in for joint filers with taxable income between $315,000 and $415,000 and for all other taxpayers with taxable income between $157,500 and $207,500.

In addition, another whole category of income qualifies for the 20% deduction. The amount of your qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income for the tax year, also qualifies for the Code Sec. 199A deduction. These would be reported on a K-1 form.

Social Security Wage Base for 2019.  The Social Security Administration recently announced the maximum earnings subject to the Social Security portion of the FICA tax will increase from $128,400 to $132,900 for 2019. The Medicare portion remains 1.45% of all earnings, and individuals with earned income of more than $200,000 ($250,000 for MFJ) will pay an additional 0.9% in Medicare taxes.

Gifting. You can give up to $15,000 to as many people as you wish in 2018-2019 free of gift or estate tax. If you are married, you both can elect to “gift split” and give up to $30,000 per beneficiary.

New For Wisconsin

Wisconsin is following federal tax law changes for the most part.  One thing they did NOT adopt was the 20% deduction for qualified business income.

Homestead Credit. For those eligible whose household income is less than $24,680, the following losses must be added back in beginning in 2018: net losses from sole proprietorships, sale of business property, rental real estate, partnerships, trusts, etc.  This does not apply to farmers whose primary income is from farming.

WI Tuition and Fees Subtraction. The income phase-outs increased substantially from $54,190 to 65,030 for single/HOH, and from $86,700 to 108,380 for MFJ.  More taxpayers will qualify for this subtraction.

College Savings Account Subtraction. For 2018, the subtraction increases to $3,200 from $3,140. 

Meals and Entertainment Expense.  Beginning in tax year 2018, WI is NOT following federal law, but is still allowing an entertainment subtraction with a 50% limitation.  WI is also still allowing 50% for employer provided meals. 

Unclaimed Property. This would include forgotten bank accounts, insurance policies, uncashed dividends, etc. Visit the WI Dept of Revenue Unclaimed Property webpage for more information about the program. You can also search an online database for unclaimed property in Wisconsin.

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Senate tax writers on Capitol Hill continue to discuss bipartisan retirement savings bills as the House gears up for a vote on a related tax measure.

Senate tax writers on Capitol Hill continue to discuss bipartisan retirement savings bills as the House gears up for a vote on a related tax measure.

The Senate Finance Committee (SFC) held a May 14 hearing during which lawmakers on both sides of the aisle highlighted the importance of moving forward with retirement savings-related legislative efforts. While a number of related tax proposals have been introduced recently, SFC lawmakers paid particular focus to the bipartisan Retirement Enhancement Savings Bill, more commonly referred to as “RESA.”

“[T]his committee worked on a bipartisan basis to put together the [RESA],” SFC ranking member Ron Wyden, D-Ore., said during opening statements. “Our bill is all about making it easier for employers -- particularly small businesses -- to offer retirement plans to their employees,” Wyden added. “Giving those small businesses an opportunity to band together and offer a common retirement plan is a simpler and more cost-effective way of helping more people save.”

House Vote Expected on Secure Bill

Notably, the Senate’s RESA bill has many similarities to the House’s Setting Every Community Up for Retirement Enhancement (SECURE) Bill of 2019 (HR 1994). The bipartisan SECURE Bill is expected to reach the House floor for a full chamber vote in the coming days.

“We’re on track to go to the House floor this month,” Kara Getz, chief tax counsel for House Ways and Means Committee Chairman Richard Neal, DMass., has said. Getz, while speaking on May 10 at the American Bar Association (ABA) May Tax Meeting in Washington, D.C., said that the House bill is derived from a true “partnership” between Democrats and Republicans.

To that end, SFC Chairman Chuck Grassley, R-Iowa, alluded during the May 14 hearing that the Senate and House measures could soon be reconciled and enacted. “I’m hoping that the House will send its version of RESA over to us at some point this month,” Grassley said. “And, I’ll continue to work closely with Senator Wyden and other Committee members to reconcile the differences and get this important bill to the President.”

Additionally, Drew Crouch, senior tax counsel for the SFC minority, while speaking on May 10 at the ABA May Meeting, stated that there is a “high probability” the retirement bill(s) will be enacted this year. Crouch further emphasized this position by adding that that there is a “high chance retirement legislation will make it across the finish line,” in this Congress.

Retirement Savings 2.0

Meanwhile, House and Senate lawmakers are already working toward Retirement Savings “2.0,” Getz stated at the ABA May Meeting. House tax writers are “actively working on 2.0,” Getz said, adding that, “we would really like to markup a second retirement bill.”

Likewise, Grassley alluded to the Retirement Savings 2.0 initiative on May 14, noting in his
opening statement that the SFC hearing “marks the start of our work on the next round of retirement savings reforms.”

To that end, SFC members Rob Portman, R Ohio, and Ben Cardin, D-Md., on March 14 introduced
a 132-page bipartisan retirement savings tax bill. The Retirement Savings & Security Bill would
make several sweeping reforms to retirement savings.

President Donald Trump and Democratic congressional leaders have agreed to develop a $2 trillion infrastructure plan, according to Senate Minority Leader Chuck Schumer, D-N.Y.

President Donald Trump and Democratic congressional leaders have agreed to develop a $2 trillion infrastructure plan, according to Senate Minority Leader Chuck Schumer, D-N.Y.

$2 Trillion Infrastructure Plan

"There was goodwill in this meeting…which is a very good thing," Schumer told reporters at the White House on April 30 after meeting with Trump. "We agreed on a number – $2 trillion for infrastructure,"Schumer said. Further, House Speaker Nancy Pelosi, D-Calif., and Schumer both praised Trump after the meeting for his bipartisan cooperation.

The president and Democratic leaders were to meet again to discuss how to pay for the infrastructure plan, Schumer said. At that time, Trump is expected to convey his ideas on funding, Schumer added. "This was a very, very good start…and we hope it will go to a constructive conclusion."

“Pay-Fors”

Additionally, Schumer told reporters at the White House that the infrastructure plan’s "pay-fors"remained undetermined. Notably, Schumer suggested from the Senate floor on April 29 rolling back part of Republicans’ 2017 tax reform law to fund infrastructure costs.

Generally, infrastructure is considered a bipartisan priority among lawmakers. However, reaching an agreement on how to pay for the reportedly $2 trillion infrastructure plan that is still in development is expected on Capitol Hill to be an arduous task. Namely, Democrats are expected to propose scaling back certain tax cuts under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) to foot the infrastructure bill, which is not likely to receive GOP support.

"That’s a non-starter" Senate Majority Leader Mitch McConnell, R-Ky., told reporters at the U.S. Capitol on April 30. "This tax bill [TCJA] is what has generated this robust economy; the last thing we want to do is step on all of this growth…by repealing in effect what has generated all of this prosperity and low unemployment," McConnell said.

White House: Meeting Excellent, Productive

Meanwhile, the White House praised the April 30 infrastructure meeting between Trump and top congressional Democrats, calling it "excellent and productive," as noted in a statement released by White House Press Secretary Sarah Huckabee Sanders shortly after the meeting. Notably, however, the statement did not mention the $2 trillion figure allegedly agreed upon by Trump and Democratic congressional leadership.

"We will have another meeting in three weeks to discuss specific proposals and financing methods,"Sanders added. "The president looks forward to working together in a bipartisan way and getting things done for the American people."

Highly anticipated proposed regulations have been issued on the withholding required with respect to the disposition of certain partnership interests. The proposed regulations affect certain foreign persons that recognize gain or loss on the disposition of an interest in a partnership that is engaged in a trade or business in the United States, and persons that acquire those interests. Also affected are partnerships that directly or indirectly have foreign partners.

Highly anticipated proposed regulations have been issued on the withholding required with respect to the disposition of certain partnership interests. The proposed regulations affect certain foreign persons that recognize gain or loss on the disposition of an interest in a partnership that is engaged in a trade or business in the United States, and persons that acquire those interests. Also affected are partnerships that directly or indirectly have foreign partners.

Gain or loss from the disposition of a partnership interest is treated as income effectively connected to a U.S. trade or business, to the extent that there would have been effectively connected income to the foreign partner, if the partnership assets were sold under Code sec. 864(c)(8). The withholding rules of Code Sec. 1446(f) require 10 percent withholding on the amount realized on the disposition, absent certification that the transferor is not a nonresident alien or foreign corporation.

The proposed regulations are a companion to Proposed Reg. 1.864(c)(8)-1 issued in December 2018, on gain or loss by foreign persons on the disposition of a partnership interest.

Reporting, Withholding and Paying Tax

The proposed regulations provide rules for withholding, reporting and paying tax upon the disposition of a partnership interest in a partnership described in Code Sec. 864(c)(8) and Proposed Reg. 1.864(c)(8)-1. The proposed regulations adopt much of the temporary guidance issued in Notice 2018-29, I.R.B. 2018-16, 495, which looked to the rules for withholding on dispositions of U.S. real property interests by foreign persons in Code Sec. 1445.

The proposed regulations also:

• clarify the reporting rules for transfers of partnership interests under Code Sec. 6050(k),
• provide rules for implementing withholding by brokers on transfers of certain interests in publicly traded partnerships,
• make changes to withholding rules for distributions by publicly traded partnerships,
• make changes to reporting rules and procedures for adjusting withholding; and
• provide coordination rules to prevent overwithholding.

A transferee is required to report and pay any tax withheld by the 20th day after the date of the transfer. Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests, and Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests.

The proposed regulations also provide rules that address a partnership’s requirement to withhold if the transferee fails to withhold.

General Rule and Exceptions

A transferee of a partnership interest must withhold a tax equal to 10 percent of the amount realized on any transfer of a partnership interest (other than certain publicly traded partnership interests), if the gain is treated as effectively connected income.

There are six exceptions to withholding under the proposed regulations:

• certification by transferor of non-foreign status,
• certification by transferor that no gain is realized on transfer by transferor,
• certification by partnership that effectively connected gain from the disposition would be less than 10 percent,
• certification by transferor that for prior three tax years its effectively connected taxable income for each year was less than 10 percent of its total distributive share of net partnership income for the year;
• certification by transferor that a nonrecognition provision applies, and
• certification by transferor that a treaty provision applies.

Publicly Traded Partnership Interests

The proposed regulations provide rules for withholding and reporting on the transfer of an interest in a publicly traded partnership (a PTP interest). The withholding obligation is generally limited to brokers that receive proceeds from the sale and act on behalf of the transferor. Once the proposed regulations are final, the suspension on withholding on a PTP interest in Notice 2018-08, I.R.B. 2018-7, 352, will end.

Notice Requirements

A foreign partner that transfers its partnership interest will need information from the partnership to compute its tax liability based on the deemed sale. Rules are provided that will facilitate the transfer of information between a foreign partner and partnership for purposes of Code Sec. 864(c)(8).

Proposed regulations provide rules on the attribution of ownership of stock or other interests for determining whether a person is a related person with respect to a controlled foreign corporation (CFC) under the foreign base company sales income rules.

Proposed regulations provide rules on the attribution of ownership of stock or other interests for determining whether a person is a related person with respect to a controlled foreign corporation (CFC) under the foreign base company sales income rules.

The proposed regulations also provide rules to determine whether a CFC receives rents in the active conduct of a trade or business, for determining the exception from foreign personal holding company income.

Ownership Attribution

The proposed regulations provide specific rules for applying principles similar to those in the Code Sec. 958(b) constructive ownership rules when determining related person status under the foreign base company sales rules. Determining related person status is relevant for many purposes, including whether certain types of income can be characterized as subpart F foreign base company sales or service income.

A person is a related person with respect to a CFC if the person is:

• an individual who controls the CFC;
• an entity that controls or is controlled by the CFC; or
• an entity that is controlled by the same person that controls the CFC.

Under current Reg. §1.954-1(f), the Code Sec. 318(a)(3) downward attribution rules, which attribute ownership downward from the owner of an entity to an entity, apply by reference to the Code Sec. 958stock ownership rules. These rules are applied regardless of the size of the ownership interest in a partnership, estate or trust, but are applied to corporations based on a 50-percent or more ownership interest.

Based on concern that the downward attribution rules could produce inappropriate results, the proposed regulations provide that the downward attribution rule of Code Sec. 318(a)(3) and Reg. §1.958-2(d) will not apply for purposes of determining related person status under the foreign base company sales income rules.

This change does not preclude a corporation, partnership, trust, or estate from being treated as controlled by the same person or persons that control the CFC under other rules that remain applicable for the related person rules.

Additionally, an anti-abuse rule is provided with respect to the option attribution rule in Code Sec. 318(a)(4). The option attribution rule will not be applied to treat a person with an option as owning the stock or equity interest for purposes of the related person rule if the principal purpose of using the option was to cause a person to be treated as a related person.

The proposed regulations also incorporate a similar rule issued in Notice 2007-9, 2007-1 CB 401. The rule applies if the principal purpose for the use of an option is to qualify dividends, interest, rents or royalties paid by a foreign corporation for the Code Sec. 954(c)(6) CFC look-through exception from foreign personal holding company income. The rule is proposed to apply for tax years of CFCs beginning after December 31, 2006, and ending before the date that final regulation are published in the Federal Register, and for tax year of U.S. shareholders in which or with which such tax years end.

Foreign Personal Holding Company Rules

The proposed regulations modify the foreign personal holding company rules on amounts paid or incurred by a CFC in connection with the CFC’s rental income and the active rents exception. Rents are excluded from foreign personal holding company income if they are:

• received from a person other than a related person; and
• from the active conduct of a trade or business.

If rents are from leasing property as a result of marketing activities, there must be a substantial marketing organization in order to meet the active trade or business test. Under a safe harbor, an organization is substantial if active leasing expenses equal or exceed 25 percent of adjusted leasing profit. If the CFC receives rents from property it does not own, the substantiality of the organization is determined net of those rent payments.

The propose regulations extend the rule to apply to royalties, in addition to rents. As a result, the substantiality of the organization is determined under the safe harbor, net of the rents or royalties paid or incurred by the lessor CFC, for the right to use the property (or a component part of the property) that generated the rental income.

Applicability Date

The proposed regulations are generally proposed to apply to tax years of CFCs ending on or after the date the final regulations are published in the Federal Register, and for tax year of U.S. shareholders in which or with which such tax years end.

Final regulations have been issued on transactions of U.S. taxpayers that have qualified business units (QBUs) with functional currency other than the U.S. dollar.

Final regulations have been issued on transactions of U.S. taxpayers that have qualified business units (QBUs) with functional currency other than the U.S. dollar. Specifically, the final regulations:

• cover combinations and separations of QBUs subject to Code Sec. 987 (Reg. 1.987-2 and Reg. 1. 987-4),
• cover recognition and deferral of foreign currency gain or loss with respect to a QBU subject to Code Sec. 987 in connection with certain QBU terminations and other transactions involving partnerships (Reg. 1. 987-12), and 
• withdraw Temporary regulations that determine a partner’s share of assets and liabilities of a Code Sec. 987 aggregate partnership (Temporary Reg. 1.987-7T). In general, the regulations prevent the selective recognition of Code Sec. 987 gain or loss.

Applicability Dates

The IRS declined to extend the applicability of these provisions. The final regulations retain the applicability dates of the temporary regulations, as extended by IRS guidance. The final regulations under Reg. 1.987-2 and Reg. 1. 987-4 generally apply to tax years beginning on or after the day that is three years after the first day of the first tax year following December 7, 2016. The final regulations under Reg. 1. 987-12 generally apply to any deferral event or outbound loss event that occurs on or after January 6, 2017.

Medicaid waiver payments were earned income, even though IRS Notice 2014-7 treated them as “difficulty of care” foster care payments that were excluded from gross income. The Tax Court held that excluding the payments from earned income would improperly deny the taxpayers’ earned income credit and the additional child tax credit.

Medicaid waiver payments were earned income, even though IRS Notice 2014-7 treated them as “difficulty of care” foster care payments that were excluded from gross income. The Tax Court held that excluding the payments from earned income would improperly deny the taxpayers’ earned income credit and the additional child tax credit.

IRS Excludes Medicaid Waiver Payments From Gross Income

The taxpayers received payments under a state Medicaid waiver program for proving care to their adult disabled children in the family home. IRC §131 excludes foster care payments from gross income, but it applies only when the foster individuals are placed in the caregiver’s home by the state. Despite the statutory language, however, Notice 2014-7 treats Medicaid waiver payments as excludable “difficulty of care” foster payments. Thus, the taxpayers excluded the payments from their gross income.

Gross Income Vs. Earned Income

However, the taxpayers included the payments in their earned income, which allowed them to claim the earned income credit and the additional child tax credit. The IRS denied the credits, arguing that only gross income can be earned income. The Tax Court sided with the taxpayers.

No Deference For Notice 2014-7

The court concluded that Notice 2014-7 was entitled to little if any deference for two reasons:

1. The taxpayers’ payments did not satisfy the plain statutory definition of excludable foster care payments.
2. The notice reversed the IRS’s long-held position that payments like these were not foster care payments

Although the Medicaid waiver payments were not covered by §131, they absolutely fell within the statutory definition of “earned income.” The IRS could not rely on Notice 2014-7 to deny credits that Congress clearly intended to provide for earned income.

IRS, Not Congress, Provided Double Benefit

Finally, the court recognized that the taxpayers were receiving an unintended double benefit, because they were getting tax credits that were based on tax-free income. However, this was only because the IRS:

1. unilaterally decided to exclude Medicaid waiver
   payments from gross income, and
2. failed to argue that if the Tax Court included the payments in earned income, they should also be included in gross income.