This is such a helpful thread! I'm a new caregiver for my elderly father and just started receiving Medicaid waiver payments last month. I had no idea about Notice 2014-7 or how it affects the EIC calculation. Reading through everyone's experiences, it sounds like the key is being very explicit about what you're doing and why when you file. I'm planning to use the Form 8275 approach that Ravi mentioned, along with including that IRS FAQ reference from Freya. One question though - for those who successfully got this resolved, did you have to provide any specific documentation from the state Medicaid office, or were your regular payment statements sufficient? I want to make sure I have everything I need before I file to avoid the headache you all went through.

I've been dealing with this exact issue for two years now as a caregiver for my mom under our state's Medicaid waiver program. What I've learned is that you really need to be proactive about documentation from the start. Here's what has worked consistently for me: I always file with Form 8275 attached, clearly stating that I'm applying Notice 2014-7 to exclude the payments from gross income while including them for EIC calculation. I also include a cover letter that references both Notice 2014-7 AND the IRS FAQ that Freya mentioned - having both citations seems to help. The most important thing I learned is to keep detailed records of ALL your Medicaid waiver documentation - not just the payment statements. I keep copies of my initial eligibility determination, care plan updates, and any correspondence with the state office. When the IRS sees this comprehensive documentation, they seem to process it correctly without the automated system flagging it. Also, if you do get an adjustment notice like Paolo did, respond immediately with all your documentation. Don't wait - the longer you wait, the more complicated it gets to resolve. The IRS agents I've spoken with say these cases are much easier to fix when people respond quickly with proper documentation.

Remember that if you have ANY other traditional IRA money (like old 401k rollovers), the backdoor Roth gets much more complicated because of the pro-rata rule. The IRS doesn't let you just convert the non-deductible contribution - you have to convert proportionally from all your IRA balances. For example, if you have $50,000 in traditional IRA money from an old 401k rollover, and then you add $6,200 non-deductible for your backdoor, you can't just convert the $6,200. The conversion would be considered to come proportionally from both sources, so most of it would be taxable. Many people overlook this and get hit with unexpected taxes. One workaround is to roll any existing traditional IRA funds into your current employer's 401k (if they allow it) before doing the backdoor.

Just to add one more thing about Form 8606 - make sure you don't miss filing it for BOTH years. I forgot to file it the year I made my non-deductible contribution (only filed it the year I did the conversion) and it caused a huge headache. The IRS sent me a letter questioning the conversion, and I had to provide extra documentation proving the original contribution was non-deductible. Save yourself the trouble and make sure you file Form 8606 for 2023 (reporting the non-deductible contribution) and then again for 2024 (reporting the conversion).

I'm an expat married to a non-US citizen without an SSN, and I've been through this exact process. One thing nobody mentioned is that you can actually go to an IRS Taxpayer Assistance Center in person and they can verify your spouse's documents on the spot! This saved us from having to mail in original documents or find a Certifying Acceptance Agent. You need to call to make an appointment first (this is where Claimyr could help), but it's free and much faster than mailing everything in. Just bring your spouse, their passport, your marriage certificate, and the completed W-7 form.

I'm going through something similar right now! One additional option that might help is to check if your spouse qualifies for an exemption from getting an ITIN. If your spouse is a nonresident alien who doesn't have U.S. source income and won't be claimed as a dependent, you might be able to file as "Married Filing Separately" and treat your spouse as a nonresident alien. This could actually be beneficial tax-wise in some cases, especially if your spouse has no U.S. income. You'd file Form 1040 or 1040-SR and just put "NRA" (Nonresident Alien) in the spouse information section instead of an SSN or ITIN. However, you'll want to double-check this with a tax professional since the rules around resident vs. nonresident status can be pretty complex, especially if your spouse spent any time in the U.S. during the tax year. The substantial presence test and other factors come into play.

Make sure when you're doing the 8606 that you're consistent with your records from previous years! This tripped me up last year. If you've done backdoor Roth conversions before, line 2 of Form 8606 should include any "basis" carried over from previous years. If this is your first one, then line 2 would be $0 and line 3 would match line 1 ($7,000). Also, when you enter the 1099-R information in your tax software, some programs will try to tax the entire amount unless you specifically indicate it was a Roth conversion and direct it to Form 8606.

Just went through this exact same situation last month! One thing that really helped me was keeping detailed records of the timeline. I created a simple spreadsheet with: - Date of Traditional IRA contribution: $7,000 - Date of conversion: $7,002.35 - Interest earned: $2.35 This made filling out Form 8606 much clearer. The key insight that finally clicked for me was that the $7,000 represents your "basis" (what you put in with after-tax dollars), while the $2.35 is considered earnings that you've never paid tax on, which is why it becomes taxable income. For future years, definitely consider doing the conversion immediately after contribution like others mentioned. I set up my 2025 backdoor Roth to convert the same day to avoid this complexity entirely. Most brokerages make this really easy to automate. Also, keep good records because if you do backdoor Roths in future years, you'll need to reference this year's Form 8606 for the carryover amounts. The IRS doesn't track your basis for you - that's on you to maintain accurately!

This is such a helpful thread! I'm dealing with a similar situation as a new grad student. One thing I'd add is that your roommate should also check if her university has a tax office or financial aid office that can help clarify how her specific stipend should be classified. My school's financial aid office was actually really helpful in explaining which parts of my funding package counted as earned income vs. unearned income. They see this question all the time and often have examples of how similar stipends have been treated by the IRS in the past. Also, if she does end up needing to withdraw the excess contribution, make sure she requests to withdraw the "excess contribution plus earnings" specifically - the IRA provider will calculate exactly how much earnings are attributable to that excess amount. Don't just guess at the number or withdraw a round amount, because that could create additional tax complications. Good luck to your roommate! The fact that she's addressing this now instead of ignoring it shows she's being really responsible about fixing the situation.

One more thing to consider - if your roommate does need to withdraw the excess contribution, she should make sure to do it before December 31st if possible, rather than waiting until the tax filing deadline. While she technically has until April to fix it without penalty, withdrawing earlier in the year can simplify the tax reporting. Also, I'd strongly recommend she keeps detailed records of all communications with her IRA provider about this issue. If there's any confusion later about whether the withdrawal was processed correctly or how much was attributable to earnings, having that paper trail will be invaluable. The silver lining here is that this is a learning experience that will help her avoid similar issues in future years. Many grad students don't realize how tricky the earned income rules can be with academic funding until they run into exactly this situation!