Big News: New Tax Ruling Could Mean a “Hidden Pay Raise” for Live-In Family Caregivers

A recent IRS decision confirms tax-free wages for eligible Community First Choice (CFC) caregivers.

Here is what it means for your family’s bottom line.

If you are a family caregiver living in the same home as the Medicaid member you support, we have incredible news that could significantly increase your take-home pay.

For years, caregivers under traditional HCBS waivers have utilized the “Difficulty of Care” (DOC) tax exclusion to earn tax-free income. However, when Colorado launched Community First Choice (CFC) in July 2025, there was uncertainty about whether this benefit would carry over to the new program.
The wait is over. On January 7, 2026, the Department of Health Care Policy & Financing (HCPF) released a critical update confirming that the IRS has ruled in favor of Colorado families.

What is the “Difficulty of Care” Exclusion?

Under IRS Notice 2014-7, the “Difficulty of Care” rule allows live-in caregivers to exclude payments from their gross income for federal income tax purposes.
Simply put: If you live with the person you care for, your caregiving wages may be 100% federal income tax-free.

The New Ruling: Direct Care CFC Services Are Eligible

According to the new guidance (HCPF IM 26-001), the IRS issued a Private Letter Ruling on December 12, 2025, confirming that payments for Direct Care CFC Services provided by a live-in caregiver are considered “Difficulty of Care” payments.

This ruling confirms three massive wins for families:

1. Tax-Free Income: You do not need to report these payments as wages subject to federal income tax.
2. Retroactive Benefits: This ruling applies retroactively to services provided starting July 1, 2025. If taxes were withheld from your paycheck during the second half of 2025, you may be eligible to recoup that money.
   
3. Medicaid Eligibility Protection: For caregivers who rely on MAGI Medicaid for their own health insurance, this income is now exempt from eligibility determinations. This ensures that earning a living caring for your loved one doesn’t disqualify you from your own healthcare coverage.

What This Means for Your Wallet

At Caregivers First Choice, we believe in maximizing the financial stability of our families. This ruling effectively gives many live-in caregivers an immediate “raise” by removing the tax burden from their paycheck.

Example: If you earn $20/hour and work 40 hours a week, a standard tax withholding might reduce your take-home pay significantly. Under this exclusion, that same $20/hour goes straight into your pocket without federal income tax deductions, making your effective wage much higher than a standard employment arrangement.

What You Should Do Next

• Check Your Eligibility: Do you live full-time in the same home as the Medicaid member you serve?
• Review Your 2025 Pay: If taxes were withheld for CFC services provided after July 1, 2025, speak with a tax professional about amending your return.
  Contact Your Agency: Ensure your agency is aware of this ruling and has updated your tax status for 2026.

Disclaimer: Caregivers First Choice does not provide tax advice. We strongly recommend consulting with a qualified tax professional to understand how this ruling applies to your specific financial situation.