October 2023:
The MLO Minute: “Long-Term Care and Your Federal Tax Refund”
By Caitlin McAndrews, Esq. and Dennis McAndrews, Esq. —
In assessing financial eligibility for Medical Assistance (Pennsylvania’s name for Medicaid) to determine whether that federally-funded program will pay for nursing home or other long-term care, the applicant’s income and resources must be assessed. One notable exception to this assessment process is a refund from the IRS for an overpayment of federal income tax.
Pursuant to an amendment to the Internal Revenue Code in 2013, which extended a previous 2010 temporary law, 26 U.S. Code § 6409 provides that federal income tax refunds do not count as income for Medicaid purposes, which means a refund cannot cause a Medicaid recipient to be over Medicaid’s monthly income limit. Furthermore, Medicaid does not count a federal tax refund as a resource for 12-months following the receipt of the money. This means that during this 12-month timeframe, Medicaid recipients will not be in jeopardy of losing their Medicaid benefits, nor can nursing homes demand that Medicaid beneficiaries use their tax refunds towards their cost of care.
If the money is not spent within the 12-month period, any remaining money will count towards Medicaid’s modest resource limit. Unfortunately, if this pushes the Medicaid recipient’s assets over the limit, one may be ineligible for continuing Medicaid benefits. Therefore, it is important to spend the money within 12 months of receipt.
While there is a Medicaid look back rule in which a Medicaid recipient is forbidden to gift money, the tax refund is exempt from this rule during the 12-month period. This means that a Medicaid recipient can gift the money within this timeframe without penalty (which is typically not the case for other gifts). For example, the Medicaid recipient could gift the money within 12 months to an adult child for travel, to a valued charity, or to a grandchild for college, without risk of losing Medicaid benefits. PMN16771450.pdf (state.pa.us).
A Medicaid recipient should not use the funds to purchase resources that are counted towards Medicaid’s limit. This is because the purchase of non-exempt assets, such as stocks or U.S. savings bonds, will be counted towards the resource limit. If not gifted, the money from the tax refund should be used for goods or services at fair market value such as (not an exclusive list) clothing, furniture, professional fees, electronic equipment, etc. Receipts should be carefully maintained.
Unfortunately, the federal law does not expressly extend to state income tax refunds, but communications from fellow professionals in the elder law field indicate that some states are following the federal lead and applying the same standards to state tax refunds.
Our firm is committed to meeting the full needs of individuals who seek Medical Assistance/Medicaid to pay for nursing home costs or other long-term care services. Please visit our website for more articles on this topic and for our Elder Law Questionnaire which will allow us to proceed on behalf of your family.
