Disability benefits can be taxable income

I recently was asked to research whether disability benefits from Idaho Department of Health and Welfare (“IDHW”) can be taxed.  In certain circumstances, the answer is yes!  Apparently this differs from what IDHW has been telling people, which proves the old adage: “Don’t get legal advice from government agencies.”  Okay, I guess that’s not an adage, but it should be.

The specific situation I looked into is a parent providing in-home care for his or her adult, developmentally delayed son or daughter.  In that case, the payments made to the parent by IDHW are usually taxable as ordinary income to the parent for services rendered.  The rationale here is this: the developmentally delayed adult receives a (non-taxable) benefit from IDHW with which that person is allowed to shop in the marketplace for services.  The DD adult (usually through his or her parent and legal guardian) has chosen the parent and legal guardian as the provider of the services, and the DD adult therefore pays the parent/guardian for those services.  Thus, the money paid to the parent/guardian is taxable income.

Apparently there is a common belief circulating among parents of these adult DD folks, as well as among some tax professionals, that parents can exclude the money from income under Section 131 of the Internal Revenue Code.  This is likely false.  Section 131 governs payments made to foster parents, which are generally excluded from income.  But, “foster” parent and “biological” parent are mutually exclusive in the eyes of the IRS.  Thus, if the parent is a biological parent, he or she cannot claim exclusion under Section 131.

This confusion is worsened by the fact that apparently IDHW requires parents of adult DD folks to bill under the “foster parent” services code.  This is a good example of the sort of thing that seems to be happening these days at IDHW — their justification for requiring the use of this (incorrect) billing code is that it results in the parents being paid the correct amount for their services.  That may be, but it begs the question why IDHW can’t add a new code that accurately reflects the situation, instead of borrowing a preexisting, false billing code that mostly confuses people.  But then again, I have lots of trouble explaining most of what’s happening over at IDHW these days…

Bottom line — if you are receiving payments for the care of your adult son or daughter for services you are providing to him or her, that money is likely taxable.

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