What is the Gift Tax / Gift Tax Exemption?
Gift tax is a federal tax that is applied when a person (a donor) gives something of value, such as cash or real estate, to someone else (a donee) without payment or receives payment under fair market value. The person who gives the gift is responsible for paying the gift tax, not the recipient.
The Internal Revenue Services (IRS) sets an Annual Gift Tax Exemption. This allows persons to give up to a certain amount without filing a Gift Tax Return (reporting it to the IRS). In 2025, the Gift Tax Exclusion is $19,000 per donee (recipient). This is an increase of $1,000 from 2024. Note: Some gifts are exempt from gift taxes. This includes tuition payments made directly to a school, or medical expenses paid directly to a health care provider, for the benefit of someone else.
There is no limit to the number of persons a donor can give. Take an elderly woman with 3 adult children and 7 grandchildren. She can gift $19,000 to each one, totaling $190,000 for the year, and still not be required to file a Gift Tax Return. Her spouse can also gift each of them $19,000 without reporting it to the IRS. This allows a married couple a combined Annual Gift Exclusion of $38,000 per recipient. Furthermore, both spouses can continue gifting each recipient the maximum Gift Exclusion year after year without reporting it.
While gifting more than $19,000 per recipient ($38,000 in the case of a married couple) requires that a Gift Tax Return (Form 709) be filed, the donor likely will still not pay taxes on the gifts. This is because the IRS has a Lifetime Gift Tax Exclusion on reported gifts. For individuals, in 2025, this amount is $13.99 million (up from 13.61 million in 2024), and for married couples, it is $27.98 million. Filing a Gift Tax Return is how the IRS tracks the amount one has gifted towards their Lifetime Exclusion. Essentially, an individual could gift up to their lifetime maximum ($13.99 million) all at once and still not pay taxes on it. However, additional tax-free gifts would be prohibited. This Lifetime Exclusion includes gifts that are given after death.
The Lifetime Gift Tax Exclusion amount is expected to decrease significantly in 2026. It is estimated it will be approximately $5 million for an individual.
How Does Gifting Impact Medicaid Eligibility?
For Nursing Home Medicaid and HCBS Medicaid Waiver eligibility purposes, each state has a Look-Back Period, during which all past asset transfers are reviewed to ensure none were given away to meet Medicaid’s asset limit. The asset limits vary by state, and in 2025, range from $1,600 to $32,396 for a single applicant. California is an exception; there is no asset limit (eff. 1/1/24). Therefore, the Look-Back Period is not relevant.
In nearly all states, the Look-Back Period is 60-months immediately preceding the date of one’s long-term care Medicaid application. New York is an exception; there is no “look back” for Community Medicaid, the program through which long-term home and community based services is available. The state, however, will implement a 30-month Look-Back Period no sooner than sometime in 2025.
If a Medicaid applicant has gifted assets or sold them under fair market value during the “look back”, there will be a Penalty Period of Medicaid ineligibility. The length of disqualification is determined by the amount of the gift and the average cost of private pay nursing home care in the state in which one lives.
The IRS Gift Tax Exemption does not extend to Medicaid eligibility. Gifting the maximum Annual Gift Tax Exclusion of $19,000, or any amount for that matter, is a violation of Medicaid’s Look-Back Rule. As an example, say a Medicaid applicant gifted his granddaughter $19,000 for college two years prior to applying for Medicaid. While the IRS did not tax this gift, it does violate Medicaid’s Look-Back Period, and a Penalty Period of Medicaid ineligibility will be established. However, if the same person gifted his granddaughter $19,000 prior to Medicaid’s 60-month Look-Back Period, there is no period of Medicaid disqualification.
There are exceptions to the Look-Back Rule and not all transfers (gifts) result in a period of Medicaid ineligibility. For instance, there is a Caregiver Child Exemption and a Sibling Exemption, which allows a Medicaid applicant to transfer their home to their adult child or sibling under certain circumstances.
What Can be Done about Past Gifts Made?
If one has unknowingly violated Medicaid’s Look-Back Period, this is not automatic cause for panic. Some states will recalculate the Penalty Period, given Medicaid applicants are able to get the gifts (generally cash) back. Some states allow partial return, while other states require full collection. The return of assets generally results in the Medicaid applicant having “excess” assets, or put differently, assets over Medicaid’s limit. As long as the applicant is over the asset limit, they will not qualify for Medicaid.
However, the applicant is able to “spend down” excess assets without violating Medicaid’s Look-Back Rule. For instance, an elderly applicant might pay for their long-term care until the excess assets have been depleted, pay off debt, make home modifications for safety and accessibility, or purchase an Irrevocable Funeral Trust. Once the excess assets have been “spent down”, they would qualify for Medicaid.
There is another option for persons who are unable to get their gifted assets back. Although infrequently permitted, there is an Undue Hardship Waiver that one can pursue. In simple terms, this waiver is granted when an applicant can prove that they will endure “undue hardship” if the Penalty Period is not lifted. This means that an applicant would lack appropriate medical care, shelter, food, clothes, and other things essential to living if denied long-term care Medicaid eligibility.
Does Receiving a Gift Affect Medicaid Eligibility?
Yes, receiving a gift can affect Medicaid eligibility. Remember, Medicaid has an asset limit for eligibility purposes, and even a small gift can push a Medicaid applicant / recipient over the limit.
As an example, Fred is a Medicaid recipient living in a nursing home. He lives in a state that limits assets to $2,000. He has $1,500 in assets, and receives a small inheritance of $2,000. In the month of receipt, the inheritance counts as income, which could potentially cause Fred to be income-ineligible for Medicaid for the month. (In 2025, the income limit is generally $2,901 / month. See Medicaid income limits by state.) The following month, any unspent inheritance will count as assets. Fred must spend the “excess” assets, in their entirety, the same month he receives the inheritance to avoid becoming asset-ineligible, and hence, disqualified from Medicaid. To avoid violating the Look-Back Rule, which can be done even after one is determined eligible for Medicaid, Fred might use the excess assets towards his nursing home care, pay off debt, or purchase an Irrevocable Funeral Trust or a Medicaid-Compliant Annuity. If disqualified due to “excess” assets, Fred will have to reapply when his assets are below the state’s asset limit.
If a gift is received prior to Medicaid application, pushing one over the asset limit, excess assets must also be “spent down” in a manner that does not violate Medicaid’s Look-Back Period.
Getting Professional Assistance
Given the complexity of Medicaid eligibility, particularly if one has assets over the limit or has violated Medicaid’s Look-Back Period, it is strongly advised that one consider Medicaid Planning. Professional Medicaid Planners are knowledgeable about the Medicaid rules in each state, are familiar with planning strategies to preserve assets for family as inheritance, and can make the application process much less complicated for an applicant. Find a Certified Medicaid Planner.