The New Jersey Division of Taxation has recently revised its position on difficulty of care (DOC) wage payments, bringing clarity and potential benefits to taxpayers who provide care to individuals with disabilities. This update affects both the taxation of these payments and their eligibility for the New Jersey Earned Income Tax Credit (EITC).
Background on Difficulty of Care Payments
Difficulty of care (DOC) payments are made to individuals who provide personal care to people with disabilities, such as in-home care for individuals with physical or mental impairments. These payments are intended to compensate caregivers for the extra effort involved in caring for someone with special needs. However, the tax treatment of DOC payments has been a point of ongoing discussion and adjustment by the New Jersey Division of Taxation.
Originally, the Division of Taxation took the position that DOC payments, when reported on a W-2, would be considered taxable income for New Jersey’s gross income tax purposes. In an update issued on February 3, 2025, the Division confirmed that these payments would be subject to the state’s gross income tax. As a result, recipients of DOC payments were initially expected to include these payments in their taxable income when filing their returns.
Subsequent Revisions of the Position
However, just one day later, the Division revised its stance, stating that DOC payments reported on a W-2 would not be taxable income for gross income tax purposes. Although these payments were no longer subject to the state’s gross income tax, the Division also indicated that DOC payments would not qualify as earned income for the purposes of the New Jersey EITC. This update, issued on February 4, 2025, left many taxpayers uncertain about their eligibility for the state’s important tax credit.
On February 21, 2025, the Division issued a final clarification, announcing that DOC payments would qualify as earned income for New Jersey’s EITC. This new position comes even though these payments are not considered taxable wages for gross income tax purposes. Essentially, the Division confirmed that taxpayers receiving DOC payments can still claim the EITC, ensuring that they are not excluded from this valuable tax benefit.
Implications for Taxpayers
This clarification is a welcome change for many taxpayers who receive DOC payments and rely on the New Jersey EITC. The EITC is a significant financial relief for low to moderate-income individuals and families, and the ability to claim the credit—despite the non-taxable nature of DOC payments—will provide much-needed support.
Taxpayers who receive DOC payments should take note of this update and consult with a tax professional to ensure they are taking full advantage of this tax credit. Even though DOC payments are exempt from gross income tax, they still count as earned income for EITC purposes, which could result in a more favorable tax outcome.
The New Jersey Division of Taxation’s recent revision on DOC payments provides much-needed clarity for caregivers and taxpayers who receive these payments. By allowing DOC payments to qualify for the New Jersey EITC, the state has ensured that recipients will not lose out on this important financial benefit. As always, staying informed and consulting with a tax professional is essential to navigating these evolving rules.
You can reach Martin D. Hauptman at mhauptman@mblawfirm.com or 973-243-7912.