During this season of giving, many share their gratitude via monetary gifts to loved ones and friends, but it’s easy to overlook the related legal and tax implications of our year-end gifting. A basic understanding of the gift tax and Medicaid rules will help you navigate gifting strategically and will make your holidays more enjoyable.
The Tax Implications of Gifting
Making gifts in any amount, and for any reason, could have tax implications. A gift is considered the transfer of money or property to another person for less than adequate consideration. Under Federal law, a gift of any size is a “taxable gift”. However, each person has an annual exclusion amount of $16,000 (as of 2022) per gift recipient per year, which increases with inflation in one thousand-dollar increments. This exclusion allows us to make smaller gifts throughout the year without incurring a gift tax or having to file a gift tax return (the reporting requirements and tax liability for gifts over the annual exclusion are the responsibility of the donor).
If an individual makes a gift exceeding the annual exclusion amount, however, he or she must file a gift tax return by April 15 the following year in which the gift was made. Filing the gift tax return (IRS form 709) allows the IRS to keep track of gifts that exceed the annual exclusion over the donor’s lifetime. In most cases, no gift tax will be owed by the donor because gifts exceeding the annual exclusion amount are applied against the donor’s lifetime exemption. The lifetime exemption amount in 2022 is $12,060,000, which is adjusted annually for inflation.
For example, if an unmarried donor gives his child $30,000 in 2022, then the donor will file a gift tax return by April 15, 2023 showing he made a gift that exceeds the annual exclusion amount by $14,000. That donor’s lifetime exemption of $12,060,000 is then reduced by the $14,000 gift, resulting in a remaining lifetime exemption amount of $12,046,000.
Additional gifts exceeding the annual exclusion amount made over that donor’s lifetime will continue to reduce his lifetime exemption amount. The lifetime gift tax exemption amount is tied to the federal estate tax exclusion. So, if the donor from the example above died in 2022 without having made any other gifts exceeding the annual exclusion, then his lifetime gift exemption is reduced to $12,046,000 and that amount becomes his remaining federal estate tax exemption — meaning that only $12,046,000 of his estate can pass without incurring a federal estate tax. If the value of the donor’s estate is less than $12,046,000, the estate will not incur a tax and the $30,000 gift had no real tax consequence.
TIP: For tax purposes, gift-givers should be mindful of the gifts they make and should be sure to file a gift tax return where appropriate. For those individuals with substantial estates, large gifts could also mean paying a federal gift tax.
Medicaid Implications of Gifting
For many, the greater concern is the potential Medicaid implications of making a gift. Medicaid is a government benefit that helps to pay for an eligible applicant’s long-term care costs. To qualify for Medicaid coverage, the applicant must meet medical and financial eligibility criteria. The financial limits vary by state, but are universally stringent. In New York, an applicant’s resources (the total value of non-exempt assets) must be less than $16,800. There are also restrictions on the amount of monthly income that the Medicaid recipient can keep, which vary based on the care sought. Despite these financial restrictions, many people can still qualify for Medicaid by doing proper proactive planning or using tried and true “crisis” Medicaid planning strategies.
A major hurdle in qualifying for Medicaid is the “look-back” period. The look-back period is the time before the submission of a Medicaid application during which any uncompensated, non-exempt transfers (i.e., gifts) made by the applicant, or his or her spouse, will incur a penalty. During the penalty period, Medicaid will not cover the applicant’s costs of care and, instead, the applicant must privately pay for his or her own care. The look-back period for a nursing home applicant is five years, meaning that any non-exempt gifts made in the five years before the date that the nursing home Medicaid application was submitted will incur a penalty.
In 2020, New York introduced a new 30-month look-back period for those applicants seeking “Community Medicaid,” which includes payment for care received in the applicant’s home or in an assisted living facility. The projected date for implementing this 30-month look-back is April 1, 2024. Until this new 30-month look-back is implemented, there is no look-back period for Community Medicaid in New York, and asset transfers of any amount will not result in a penalty period for Community Medicaid purposes.
Many people, even some professionals, do not understand that the gifting rules for tax purposes are distinctly different from the rules for Medicaid eligibility. For Medicaid eligibility, a gift of any amount, even below the annual gift tax exclusion amount, can result in a penalty period for Medicaid if the gift was made within the applicable “look-back period.” Gift-givers should be mindful of this distinction when making their holiday gifts, offering financial assistance to their loved ones, or if they’ve been instructed to make annual gifts up to the annual gift tax exemption amount.
This doesn’t mean that a person who may be concerned about long-term care in the future should refrain from making gifts. There are exceptions to the Medicaid rules which allow for gifts to be made to certain exempt individuals, or for reasons other than to qualify for Medicaid.
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Gifts made to celebrate life events and holidays are wonderful gestures, but it’s important that you seek professional guidance to avoid potential pitfalls and take advantage of exemption opportunities.
Megan R. Conroy, Esq., is a partner in the Orange County law firm of Blustein, Shapiro, Frank & Barone, LLP. Ms. Conroy is a member of Wealth Counsel, ElderCounsel, the National Academy of Elder Law Attorneys, the New York State Bar Association (Trusts and Estates and Elder Law Sections), and the Hudson Valley Estate Planning Council. In 2018 she was named the Outstanding New Lawyer by the Women’s Bar Association of Orange and Sullivan Counties and was selected by the Junior League of Orange County as a “Rising Star.” You can reach Ms. Conroy at (845) 291-0011 or at mconroy@mid-hudsonlaw.com. The information in this article is for general information purposes only and is not, nor is it intended to be, legal advice.