Disclaimer: With Medicaid, VA, and insurance regulations frequently changing, past blog posts may not be presently accurate or relevant. Please contact our office for information on current planning strategies, tips, and how-to's.
Many people may misinterpret the Gift Tax Exclusion and assume, incorrectly, that the amount they gift to a loved one will not have any effect on their Medicaid eligibility. As you are planning with your client, you will want to make it clear that even if they are within the Gift Tax Exclusion, that they will still be penalized for that gift, if it occurred within the last five years.
Gift Tax Exclusion
The Gift Tax Exclusion is an IRS regulation that affects what can count as a “gift” for tax purposes. This exclusion does NOT relate to Medicaid eligibility rules. This exclusion is an allotted amount of money, that does update every few years, that someone is allowed to give away tax-free.
In 2019, the annual exclusion is $15,000 a year, per giftee.
If your client:
- gifts less than this amount, or
- they pay for someone’s tuition or medical expenses, or
- they gift to their spouse, or
- they gift to a political organization for its use,
then, most likely, filing a Gift Tax Return will not be required.
If your client goes over the annual exclusion amount of $15,000, they will have to fill out Form 709: U.S. Gift Tax Return. However, they will not automatically be taxed on this amount. Your client will only incur tax consequences if the total gifts made exceed a certain limit.
In 2017, this lifetime gifts amount was $5.5 million for a single person but under the 2017 Tax Cut and Jobs Act, signed into law by President Trump, that amount doubled. The current rates for 2019 are $11.2 million for a single person or $22.8 million as a couple over their lifetime. These rates are set to revert back to around $5.5 million for a single person in 2026.
If your client is married, each spouse can give away $15,000 to one person. So, they can give a total of $30,000, together, to a single person. They are also allowed to give away money to multiple people. As long as no single person receives more than $15,000 a year from each spouse, filing a Gift Tax Return is not required.
For a brief overview of amounts allowed for a married couple or single person, you can find our flyer here.
Medicaid Eligibility and Gifting
If your client is hoping to become Medicaid eligible, any amount they give away for less than fair market value will be counted as a gift. If your client gave $10,000 to their daughter for Christmas, they would be penalized for the full amount of $10,000. They will not be taxed on this amount, but it will still count against them for Medicaid purposes.
However, if your client gifted $10,000 away, six years ago and they are looking to apply for Medicaid today, then that gifted amount would not be calculated against them as that amount was gifted outside of the lookback period. The lookback period is where the Medicaid agency will look back at the past five years to see if your client gifted any of their assets for less than fair market value. If they did, they would be assessed a penalty period before they will be able to receive Medicaid benefits.