Can gifts be made to family members each year within the IRS guidelines without affecting the five year look-back period for Medicaid if Mom or Dad eventually need to be placed in a nursing home?

Gift tax is a federal tax that is applied when a person gives something of value, such as cash or real estate, to someone else without payment or receives payment under market value. It is the person who gifted that is responsible for paying the gift tax. The recipient does not pay a gift tax.

The Internal Revenue Services (IRS) sets an annual gift tax exemption, which allows people to gift up to a certain amount tax-free each year. If the gift is greater than the allowable amount, the IRS needs to be notified and a gift tax return must be filed. This is because, as of 2021, there is a $11.7 million lifetime exclusion per person on reported gifts, and as long as one does not exceed this lifetime exclusion, no taxes need be paid.

It is a common misconception that the IRS gift exemption extends to Medicaid rules. It does not. The tax-free annual gift exclusion is an IRS rule that only applies to taxes. This misconception can unknowingly make your loved one ineligible for Medicaid long-term care. Those gifts, even within the IRS guidelines, are still considered gifts by Medicaid and would violate Medicaid’s look back rule.