Is Welfare Considered Income for Taxation?

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Welfare is a common name for a federal financial assistance program called Temporary Assistance for Needy Families (TANF). Since 1997, TANF has continued the work of the previous federal program, Aid to Families with Dependent Children, providing cash payments to needy families whose income falls at or below the eligible income limits. In almost all cases, recipients don't need to claim this income on their tax returns. However, the benefits may be taxable in some circumstances.

When Welfare Payments Are Exempt

  • If public assistance welfare payments are your sole source of cash income, you don't need to include them on your tax return. In fact, you almost certainly don't need to file a tax return at all. Check with a qualified tax professional, however. You may still want to file taxes in order to qualify for any refunds or tax exemptions for which you qualify during the year.

Welfare-to-Work Payments

  • If you are a part of a welfare-to-work program and earn income from a work training program or a job attained through such a program, you don't need to include this income on your tax return, as long as the income doesn't exceed the payments you would have received as a welfare recipient. If you do earn more than the equivalent of your welfare payments during the year, all of your earnings will be taxable and you will need to include your total earnings on your tax return.

Overpayment of Benefits

  • If you did not report your household income accurately, whether by accident or deliberately, TANF may discover it has overpaid you in welfare benefits. If so, or if it discovers that you have fraudulently received welfare payments during the year, your welfare benefits will no longer be exempt from taxes. You will need to report at least a portion of the public assistance benefits income you received on your taxes, depending on the amount of overpayment and the circumstances under which you were overpaid. Consult a tax professional to ensure that you are complying with all tax laws in your specific circumstances.

Medical Exemptions Limitations

  • Many, if not most, TANF recipients receive some kind of public medical insurance benefits as well. If you receive Medicaid, Medicare or any other medical assistance benefits along with your TANF payments, do not deduct medical expenses on your tax returns if they were covered by your medical insurance benefits. The IRS does not consider medical expenses deductible as out-of-pocket medical expenses if they were fully covered by Medicaid or another government medical benefits program.

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