The Medicaid Mistake That Could Cost Your Family Thousands (And How to Avoid It)
Susan still remembers the day she sat down to plan out her finances and nearly panicked. She had always filed as a live-in caregiver for her adult child and then realized: the IRS might consider some of her future medicaid income as taxable. That could impact her tax bill considerably. All because of one detail I hadn’t known during our waiver transition.
That mistake, mixing up income eligibility, caregiver pay, and CFC versus waiver-based services, is more common than you’d think. And it's exactly why Navigating Disabilities Colorado (NDC) exists: to guide you through what nobody tells you clearly.
What Families Don’t Realize
If your loved one is on a Home and Community-Based Services (HCBS) waiver, caregiver pay, even from a loved one, can be tax-exempt under IRS Difficulty of Care (DOC) rules. This means you keep more of that paycheck and reduce your tax burden. See my blog, “Colorado Medicaid Changes in 2025: Badass Insights You Need to Know for the Road Ahead” for more information.
But as those same services move to Community First Choice (CFC), Colorado’s Medicaid State Plan, DOC exemptions may no longer apply. You could owe taxes on income that used to be tax-free.
Yes, there is hope, Colorado Medicaid has requested an IRS Private Letter Ruling to restore DOC exemption for CFC benefits, which would retroactively cover 2025 income. But there's no guarantee. Click here to learn more.
That one oversight? It could cost your family thousands in taxes later, after a year, or worse, a failed appeal. This is educational information not legal advice, consult your tax professional for details.
How to Avoid That Costly Mistake
Here’s how to make sure it doesn’t happen to your family:
Know which services fall under your waiver, CDASS, IHSS, or live-in caregiver pay, so you understand eligibility for tax exemptions.
Track when services move to CFC, and ask your provider if DOC still applies, or if IRS status has changed.
Always keep waiver enrollment active, if DOC matters, especially when switching to CFC, you may need to retain a waiver-paid service monthly.
Check documentation carefully, you’ll need W-2s, MAGI eligibility forms, and proof of live-in status to show your case during tax filing.
Inside my Roadmap for the Waiver Journey, I include a full caregiver-pay checklist with tax guidance, tracking tools, and reminders for when laws change.
Real Families, Real Impact
One family I helped saved over $4,300 in taxes after confirming their care arrangement still qualified under DOC rules, when a simple waiver detail hadn't been updated.
Tedious paperwork? Yes. Worth it? Absolutely. Because that money could cover respite services, or one less late-night caregiving shift.
Resources You Can Start Using Now
Understanding Difficulty of Care (DOC): Detailed overviews from HCPF on what's tax-exempt, and what isn’t. Click here to learn more.
Why Waivers Still Matter Under CFC: A breakdown of the nuance between a waiver vs. state plan. Click here to learn more.
NDC’s Paid Caregiver Guide: Get step-by-step help to organize your documentation and avoid surprises.
Your Next Move
Avoid the “tax surprise” trap.
– Book a private consult, and I’ll walk you through your caregiver-pay scenario personally.
– Or Comment WAIVER to receive a free Caregiver Pay + Tax Exemption Checklist to help you safeguard your income now.
You’ve done the hardest part. Let me help you keep what you’ve earned, smarter, not harder.