Medicaid Pitfall #2.
Annual Gifts of $10,000.00 - $13,000.00
There is a commonly known tax law that says a person will not have to pay gift tax if he or she gives away no more then $13,000.00 (in 2010) to any other person, annually. Many people think the annual exclusion is $10,000. However, the exclusion was indexed for inflation several years ago, so the current figure is $13,000.00
This annual exclusion from Gift Tax HAS NOTHING TO DO WITH MEDICAID. The annual exclusion is a tax law, not a Medicaid law.
For example: Mr. Blue gives $13,000.00 to each of his three daughters. Within 5 years of the gift he applies for Medicaid. Mr. Blue is ineligible for Medicaid for 162 days.
Now, many of you reading this Blog may say - "Oh, no, Harold Grodberg is wrong, my accountant told me so, or my plumber told me so, or my lawyer told me so."
It is very understandable getting incorrect advice. As I indicated in my first post - you must suspend reality when thinking about Medicaid. Medicaid is a law unto itself.
In order to avoid people following bad advice, I will outline how gift tax works.
We all have $1,000,000.00 we can give away, while we are alive, free of tax. This is a tax credit against United State Gift tax. If we make gifts of no more then $13,000.00 per head, per year, we do not USE any of the $1,000,000.00 credit. This also means that if a person gives away greater the $13,000.00 to someone else, the person making the gift will use some of their $1,000,000.00 credit. For the record, the recipient of a gift is not responsible for the tax. Gift tax is imposed on the giver not the receiver.
Mrs. Orange gives $20,000.00 to her son this year. He is single, has no children, and Mrs. Orange is also unmarried.
Mrs. Orange has used $7,000.00 of her $1,000,000.00 lifetime credit. Which means she can only give away another $993,000.00 in excess of the $13,000.00 annual exclusion before she will actually have to pay "out of pocket" tax.
On the other hand, if Mrs. Orange applies for Medicaid, she will be ineligible for 83 days ($20,000/$239,41= 83).
Don't fall in the trap of confusing laws. There is a difference between Medicaid law and tax law. In fact there are many differences. Just like there is a difference between personal injury law and Medicaid law or Divorce law and Medicaid law.
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