Gift Exclusion Rises to $13,000 on Jan. 1, 2009
but Gifting Impacts Nursing Home Eligibility
The amount that an individual can gift without having to file a federal gift tax return rises to $13,000 January 1, 2009. For 97% of American taxpayers, this change will not help them at all.
Seniors often gift $13,000 or less because they think that this amount is “legal.” However such gifts can eliminate or delay their potential eligibility for Medicaid.
This annual gifting exclusion is the amount you can give to any person each year without it being a taxable gift. It is set by the Internal Revenue Service and was $12,000 last year. For many years it was $10,000, and some still think it is $10,000.
The increased gifting exclusion sounds like good news for taxpayers but few will see any impact. That's because every taxpayer has a lifetime "unified credit" from federal estate and gift taxes of $3.5 million. If your total estate -- given away during life or at death -- is less than $3.5 million overall, you will not owe a penny of federal estate and gift tax whether you gift or not.
The $13,000 (formerly $10,000) gift exclusion may be the most misunderstood rule in the entire American legal system. It is only an IRS gift tax rule.
Other agencies, such as Medicaid, do not honor the $13,000 gift exclusion. Gifts of any size cause ineligibility penalties for Medicaid nursing home coverage for the next five years. Some people think there is no penalty if gifts were $10,000 or less. That is not the case.
Under new Medicaid rules for nursing home coverage, there is a five year "look-back period" in which gifts are penalized. You total all “transfers” of any size during the five years preceding the Medicaid nursing home application. That total figure (five years worth of gifting) is the penalty imposed on the elder after he drops below $2,000 in assets. If you have less than $2,000, how can you pay tens of thousands of penalties? Likely, the generous, giving elder has just become a serious financial burden on the family.
Asset preservation in anticipation of long term care is possible, however, it cannot be accomplished effectively through annual exclusion gifting.
