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. It is the gift giver who 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 2023, the gift tax exclusion is $17,000 per donee (recipient). This is an increase of $1,000 from 2022.
With this $17,000 exclusion, 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 $17,000 to each one, totaling $170,000 for the year, and still not be required to file a gift tax return. Her spouse can also gift each of them $17,000 without reporting it to the IRS. This allows a married couple a combined annual gift exclusion of $34,000 per recipient. Furthermore, both spouses can continue gifting each recipient the maximum gift exclusion year after year without reporting it.
While gifting more than $17,000 per recipient ($34,000 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, this amount is $12.92 million, and for married couples, it is $25.84 million. Filing a gift tax return is how the IRS tracks how much one has gifted towards their lifetime exclusion. Essentially, an individual could gift up to their lifetime maximum ($12.92 million) all at once and still not pay taxes on the gift. However, they would no longer be able to make additional tax-free gifts. This lifetime exclusion also includes gifts that are given after death.
The lifetime gift tax exclusion amount is expected to decrease significantly in 2026. It is estimated that the new amount will be approximately $6.8 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 in which all past transfers are reviewed to ensure assets were not given away to meet Medicaid’s asset limit. The asset limit varies by state, and as of 2023, ranges from $1,600 to $130,000 for a single applicant.
In nearly all states, the look-back period is 60-months immediately preceding one’s Medicaid application date. California is an exception with a look-back period of 30-months. New York is also an exception and currently has no look-back period 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 March 31, 2024.
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.
Many people mistakenly think that the IRS gift tax exemption extends to Medicaid eligibility. To be very clear, gifting the maximum annual gift tax exclusion of $17,000, or any amount for that matter, is a violation of Medicaid’s look-back rule. Remember, the gift tax exclusion is a rule set forth by the IRS, not Medicaid. As an example, say a Medicaid applicant gifted his granddaughter $17,000 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. That said, if the same person gifted his granddaughter $17,000 prior to Medicaid’s 60-month look-back period, it does not violate the look-back period and 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. In more explicit terms, 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 allows a maximum of $2,000 in assets. He has $1,500 in assets, and receives a small inheritance of $2,000. In the month of receipt, the inheritance will count as income. This could potentially cause Fred to be ineligible for Medicaid for the month. (In 2023, the income limit is generally $2,742 / month. See Medicaid income limits by state.) The following month, any unspent inheritance will count as assets. This could jeopardize Fred’s Medicaid eligibility, as he must keep his assets under the asset limit. Fred must spend the inheritance that pushes him over the asset limit, in its entirety, the same month he receives it to avoid Medicaid disqualification. To avoid violating the look back rule, which can be done even after one has been found 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 Fred does not “spend down” the excess assets, he likely will be disqualified from Medicaid and have to reapply when his assets are once again below the state’s asset limit.
If a gift is received prior to Medicaid application, pushing one over the asset limit, excess assets can be “spent down” without violating Medicaid’s look-back period. Again, this may be done in several ways, as mentioned above.
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 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 make the application process much less complicated for an applicant. Find a professional planner here.