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It won’t make a difference when it comes to Medicaid eligibility.
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Are they even making enough “income” to actually need to file taxes?

G1952, your the one who’s in-laws are buying silver as investments, regularly withdraw 1k+ in cash, have difficulty recognizing $5 from $50, etc., right? it’s your hubs mom (91) & stepfather (89).

Filing separate taxes, imho, is bandaid on a much bigger problem.

Personally to me, your hubs needs to find a new elder law attorney- one that’s CELA- to look into how to best deal with their situation & do a total reset on how oversight is done with them. I think hubs needs to get guardianship or conservatorship over them. If it’s still as you posted that his mom is much much worse for her dementia, then she’s going to need to go into a facility before stepdad does. And that means there will be community spouse aspects to anything Medicaid.

NH spouse / community spouse for LTC Medicaid is flat not simple.
Segregating their income and assets is sticky. Imho not a DIY.
Seperate tax returns, doesn’t separate $ & assets for Medicaid eligibility.
If they have $$$ cash withdrawals without documentation as to where spent, “silver” investment assets, a home, joint bank accounts, are each other’s beneficiary for insurance, more than 1 car, etc., pls realize all these are issues for Medicaid.
Plus whole determination of community spouse resource allowance.
Not a DIY.

Filing separate taxes doesn’t resolve bigger issues looming.
Imo Your hubs as POA needs a new & proactive elder law attorney to come up with options & do whatever legal needed & then shepherd whatever Medicaid paperwork done.

If FiL has kids from prior marriages, what is their position if Medicaid should be needed for the wife? Often kids (or better yet their spouses) from other marriages are all “We just oh so love her” till they realize it means elders $ & assets has to be spent or sold for her to be Medicaid eligible and parents home subject to Medicaid lien. If there’s any possibility of this, that too is a reason to get a new proactive elder law attorney. Really I’d go CELA level. They have the $ to pay for this.
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Probably not for either tax or other financial reasons. Being pre-Medicaid, it is even more important that a qualified attorney and CPA handle this mess.

As for the Medicaid application, any financial relationships involving 2 persons, living together or apart, matters.

IRS won't care about Medicaid issues as of now, just that taxes are filed and paid up.

Medicaid investigates all relationships when it decides who is a part of an applicant's financial affairs. Medicaid will review applicants/couples tax return transcripts for the past 5 years.

All accounts and real properties, some personal property, insurance policies, investments of any type, secured and unsecured loans, matter. Cash and non-cash assets that changed hands for any reason by either partner during the 5 years prior is reviewed. Income from any source and taxes paid by either partner is reviewed for the 5 years. Auto ownership/registration matters. Health/life Insurance policies matter. Safe deposit boxes matter. Each type of asset will have paperwork/statements for the entire time period under review by Medicaid. Medicaid requires all documents for all items reviewed.

If married and filing joint taxes, that's one tax packet filed per year. 5 joint tax returns that must be reviewed by Medicaid.
Filed separately for 5 years? 2 returns per year matters for Medicaid. (2 returns per year x 5 years = 10 tax documents get reviewed).

Another thing to consider: Say the husband and wife owned a separate checking and savings accounts during the 5 years. An account statement is issued for each account every month of each year. NOW they must cough up all statements for each separate account. How many documents? (4 accounts x 12 statements each) x 5 years. The 48 statements x 5 years = 240 account statements that are neither chewed up and spit out by the dog or missing any pages.

So, if applying in 2020, Medicaid reviews every personal and joint financial statement all through 2019, 2018, 2017, 2016, and 2015. These are the "lookback" years.

Your spouse needs to collect all documents he can find. A qualified attorney will need these in order to know the extent of this mess. An average attorney will not be good enough for this mess so make sure whomever you use understands elders, taxes, and Medicaid issues.
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igloo572 Feb 2020
That’s a forest of paper!
for my moms application, it was 130 pages initially & submitted all at once. Then couple of followup issues & another few pages. This was individual application, a (1) checking account, a home, a pre-need funeral, MediCARE & old employer based secondary insurance, term insurance. Not taxes as not enough income to warrant filing so tax filing was over 10 years prior.
AND a letter from bank officer on bank stationary as to the disposition of closing of any accounts for last 5 years. My mom had had T bills and CDs and as they came up for renewal, they didn’t but instead went in full into her checking account. All this in detail as to date & amount and account numbers from & to were in the bank letter. Took better part of a morning & I was at the ready with all the old cancellation stuff. The amount was exact from 1 to the other. If any, any, any of this had not been the full amount, I’m pretty sure there would have been some sort of transfer inquiry done by Medicaid.

Personally I think if the dpoa has been actively involved with their elders life, is signatory on accounts and elder has kept pretty good records on finances and assets, & there's no serious debt (like a mortgage, RM, Heloc), the DpOA can get thru the individual Medicaid process on their own for them. If the NH has decent billing & SW staff that’s a big plus too (for us, it was the facility that submitted application & all documents). It will not be simple but totally do-able if your organized & kinda OCD. But if not, & especially if it’s a NH spouse / CS spouse situation, it is not a DIY to wade thru. You need an elder law atty. at a minimum & your quite right that if it’s lots of issues, a CPA or other tax pro. as well.
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Yes, it's a forest that often has more trees! Someone new to this hasn't had that experience to know married or single filing won't matter for the eligibility part. But they still have to keep coughing up papers for their separate arrangements. Too much work, especially if things weren't already organized.

I shudder at the thought of someone not knowing and choosing the married, filing single decision. I think Grams1952 asked a really good question!
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As others have stated, filing separate returns does nothing more than potentially increase the amount of taxes they might have to pay (generally married get a little break.)

Your TWO big issues are:
1) You need a BETTER attorney, versed in EC and Medicaid
and
2) STOP the withdrawal of cash (see #1)

IF at any time one or the other needs Medicaid, it WILL be denied because none of you knows where this money (1000-1500/m) is going.

IF they are being scammed, and you can prove it, maybe it will fly, but as noted by others this will NOT be a DIY project.

IF in reality this money is going to any family members on either side who are trying to get their share of inheritance early, it needs to STOP.

I would have a serious talk with the bank manager and express concerns that you think they are being scammed and need a way to stop the withdrawals until you can get to the bottom of everything.

I would find another, better attorney (naela.org using zip code can get you a list of local EC attys.) They could be of help with the bank if they refuse to work with you.

If you don't take your heads out of the sand, this is going to bite everyone and penalize the parents and both families. No Medicaid for 5 years, who is going to step up to take them in or move in with them and provide 24/7 care?
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