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Governor Mikie Sherrill

Division of Taxation

Clarification on Difficulty of Care Payments and Tax Exemption

Difficulty of Care payments are not subject to the New Jersey Gross Income Tax and should not be reported as taxable income on your New Jersey Gross Income Tax Return. This rule applies even if the payments are documented on a W-2 or 1099 form. If you file a paper return, you can enclose a written explanation and documentation to verify the exact payment amount; electronic filers may be asked to provide supporting documents at a later date.

The Division acknowledges that prior tax instruction booklets did not address Difficulty of Care payments. However, to provide clarification, the Division explicitly confirmed the tax exemption in the 2024 NJ-1040 Gross Income Tax Instructions. While this specific guidance is newly published, it does not represent a change in policy. The State of New Jersey officially recognized Difficulty of Care payments as non-taxable, provided taxpayers meet the conditions for exclusion from federal taxable income, in tax year 2014.

The Division appreciates your patience as it continues to update its guidance to better serve you.

If you mistakenly reported and paid New Jersey Income Tax on Difficulty of Care payments in previous tax years, you can claim a refund by filing an amended New Jersey income tax return with supporting documentation.

Be sure to provide one of the following items with your return:

  • W-2 from a Medicaid Waiver Agency that lists the care recipient's name.
  • W-2 plus a Document from a Medicaid Waiver Agency that includes the care recipient's name (applies if the W-2 does not include the care recipient's name).
  • Corrected W-2 (Form W-2C) that excludes DOC payments from Box 16 (NJ wages).
  • Official Agency Letter on signed company letterhead from the Medicaid Waiver Agency showing the total DOC payments for each tax year.

The amended return along with the supporting documentation can be mailed to the Division’s Office of the Taxpayer Advocate.

New Jersey law generally allows only three years from the original filing date, or two years from the time the tax was paid, whichever is later, to amend returns and claim refunds. However, you are welcome to file amended tax returns going beyond three years for consideration.

New Jersey treats Difficulty of Care payments as earned income, matching federal IRS guidelines. Consequently, any Difficulty of Care payments you receive will count toward your New Jersey Earned Income Tax Credit (NJ EITC).

The state calculates your NJ EITC as 40% of your total federal EITC amount.

For more information about Difficulty of Care payments or assistance correcting a reporting error, you can contact the Office of the Taxpayer Advocate using the following methods:

Online: Submit the Online Inquiry Form.

Phone: (609) 292-6638

Mail:
State of New Jersey
Division of Taxation
Office of the Taxpayer Advocate (OTA)
PO Box 240
Trenton, NJ 08695-0240

Fax: 609-984-5491


Last Updated: Monday, 09/28/26