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Mom needs to spend around $500 this month because she is over her income limit. Is she allowed to spend on whatever she wants?

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Medicaid in what respect. Being cared for in a nursing home? Homecare? Health insurance? How did she go over her limit?
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She needs to check with Medicaid or an elder lawyer who specializes in Medicaid. It cannot be spent on simply anything.
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Do you actually mean income or assets (bank account)? Is she in some type of facility? Is this amount something she needs to report? Will it be needed to pay for her care?
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