Is Sponsored Residential Income Tax-Free? What IRC 131(c) Means for You

As a sponsored residential provider, you open your home to care for individuals with intellectual and/or developmental disabilities (I/DD). By offering a family-style living arrangement instead of an institutional care facility, those in your care benefit from personal attention, a sense of belonging, and the chance to forge a bond with their caregivers.

Through the Virginia Medicaid CL Waiver, Sponsored Residential Services provide individuals with the support they need to live successfully in a home and community setting. The question of whether that money is taxable comes down to the tax rule IRC 131(c), which allows qualified foster care and difficulty-of-care payments to be excluded from sponsored residential income tax or host-home provider tax.

Of course, there are limits and exclusions, documentation is required, and other rules depending on the circumstances. Only a licensed tax professional should advise you on your individual situation. Still, we can provide some information to help you better understand how IRC 131(c) affects you.

What IRC 131(c) Actually Says

Difficulty-of-care payments are paid to live-in sponsored providers for any additional care required because the individual in your host home has a physical, mental, or emotional disability. Section 131(c) of the Internal Revenue Code says that the payments provided by the state, or a state-sponsored agency, received for caring for individuals with I/DD in your host home are not considered part of your taxable income. You don’t necessarily have to pay federal income tax on difficulty-of-care payments.

But there are stipulations. The person receiving the care must live in the caregiver’s home and must have an officially diagnosed mental, physical, or emotional disability. And for payments to be exempt from taxes, they must come directly from a state or local government or a certified state program, such as a Medicaid waiver.

How This Applies to Sponsored Residential and Host Home Providers

If you are currently a sponsored residential provider in Virginia or providing care in a residential arrangement (such as alternative family living), and you are living together, you could qualify for the 131(c) tax exemption. First, you need to understand the roles of the sponsoring agency and the waiver.

The sponsoring agency must:

• Certify providers/caregivers in the host home.
• Manage state licensing rules and ensure the home is safe for residents.
• Oversee and approve specific care plans for individuals with I/DD.
• Continue to track and inspect care within the host home to ensure it meets standards.

The role of the waiver:

• Waives the traditional requirements for institutionalized care, allowing I/DD residents to remain in a home setting.
• Confirms tax exclusion for difficulty-of-care payments under IRC 131(c)

Caregivers and foster parents receive a basic room-and-board stipend intended to cover residents’ needs, like housing, food, clothing, and utilities. When the person in your care requires more because they have medical, physical, or behavioral needs that call for intense supervision, you’ll receive extra funds as your difficulty-of-care payments. Your tax professional can advise you which payments qualify for tax exemption.

Talk to Amivie About Becoming a Sponsored Residential Provider

To learn more about sponsored residential services, the requirements to become a sponsored residential provider in Virginia, or to ask questions about your current role, get in touch with Amivie. By inviting an individual with disabilities into your home, you provide the support, companionship, and sense of belonging they need to make a difference in their life.

If you are currently a host home or sponsored residential provider in Virginia, make sure you speak with a certified tax professional before assuming you are eligible for the IRC 131(c) exemption. If not, you could face penalties and legal action from the federal government.