With over a million Americans living in assisted living communities across the country, families need to be aware of tax deductions that can save them money in the expensive world of senior care.
Navigating the details of tax preparation can be daunting; especially when you add in the complexities of assisted living care and medical costs. Fortunately there are ways that seniors and caregivers can get tax deductions for assisted living.
How to Plan Ahead
With over a million seniors living in more than 28,000 assisted living facilities in the U.S., according to a recent CDC study about national long-term care providers, assisted living has become big business with today’s exponentially aging population. Many seniors and their families are paying with their own resources upwards of $3,600 a month for a one-bedroom apartment, depending on the location and needs of their loved ones.
It’s no secret that consumers are paying a lot of money out-of-pocket for assisted living and, luckily, if the assisted living costs can be characterized as medical or dental expenses, families can often get a tax break.
Andy Smith, CFP®, Executive VP of Investments at The Mutual Fund Store and A Place for Mom Advisory Board member, provides financial planning to families on a daily basis and was kind enough to offer his expert guidance on tax deductions for assisted living. Here are some of his initial thoughts:
“The average retirement healthcare costs for a 65-year-old couple is $241,000. Unfortunately most people don’t plan for this early, or they find out to late in the process that they need to drastically change their long-term plans. The tax deduction is a definite help. It’s important to meet with your advisor and CPA to learn about this deduction early in the process.”
Smith notes that taxes should be considered when discussing retirement and senior care, early in the process and initial discussions, if possible. “Consider this as part of a larger whole of everything you and your loved ones really should be doing with your long-term retirement — and retirement living — plan,” he notes. By keeping excellent records, asking questions and getting help from a professional, you’ll most likely save some money.
The Assisted Living Tax Deduction
Diligent record keeping throughout the year, even for related expenses like mileage from doctor visits, can add up to a lot of write-offs come tax time. If you want to help ease the financial burden, you need to learn what you can and can’t deduct as well as keep excellent records and hold onto receipts. This diligent record-keeping you’ll be well prepared to qualify for write-offs.
It’s important to note that the taxpayer must be entitled to itemize deductions. However, other requirements differ depending on whether the taxpayer is the senior or the caregiver.
What Counts as a Write Off?
Generally, anything that is directly related to the individual’s medical care, including health or Medicare insurance, long-term care insurance, eyewear, hospitals, hearing aids and so forth, qualifies as a medical expense. You can find a complete list in IRS Publication 502. As far as the actual monthly cost of assisted living, there are stipulations.
For example, according to Smith, a facility like a nursing home is easy to take a deduction on, but it’s not so simple when it comes to assisted living:
“Nursing homes are primarily used for medical care, and medical care is always deductible. However, assisted living can sometimes be a function of a safety or companionship issue, rather than a medical issue. That’s why deductibility in those instances is not always a cut-and-dried matter.”
Married couples filing tax returns separately often have different requirements. This is when a financial advisor can help answer whether you qualify for assisted living write-offs.
Senior Tax Payer
If you’re preparing taxes on a senior’s behalf, you can deduct qualified medical expenses the taxpayer paid for during the tax year. Sometimes a doctor has to certify the senior’s medical condition to verify the medical expenses.
Caregiver Tax Payer
In order to qualify for deductions, you’ll need to do the following:
- Find out whether your loved one qualifies as a dependent.
- Make sure your loved one is a U.S. citizen or national, or a resident of the U.S., Canada or Mexico.
- You can deduct qualified medical and dental expenses on your tax return only if you provided more than half of your loved one’s support.
- You can deduct medical expenses if you are part of a collective group of individuals or family caregivers who provide more than half of your loved one’s support.
- If you qualify for the caregiver tax deduction, you will also be allowed to take a dependency exemption for that individual.
Caregivers need to also be aware that, according to the IRS, Publication 502, expenses can only be deducted if the senior has been your dependent either at the time the medical services were provided, or at the time you paid the expenses.
There may also be different requirements for married couples filing separate returns, so make sure to check with a financial advisor if you’re not sure whether you qualify for assisted living write-offs.
How Much Can You Deduct for Assisted Living?
It’s important to be aware that there are limits to how much you can deduct for qualified medical expenses when using the assisted living tax deduction. Business Management Daily notes that, “Although the deduction floor for medical expenses has increased to 10% of adjusted gross income (AGI), beginning in 2013, it remains at 7.5% of AGI through 2016 for taxpayers who were age 65 or older as of Dec. 31, 2013.”
That means, if either you or your spouse was born before January 2, 1950, the threshold is lower, and you can start claiming tax deductions for any medical expenses in excess of 7.5% of AGI. For example, if you are over 65, your AGI is $40,000, 7.5% of which is $3,000, and you have $4,000 worth of qualifying medical expenses, you can deduct $1,000 worth of expenses.
Tax Preparation is Key
Smith urges to be prepared for for taxes as there are a few things to keep in mind when getting paperwork together. He notes to keep these things in mind to make organization and preparation easier; whether you’re preparing the taxes yourself, or having a professional preparing them for yourself or your senior family member:
“Be sure to track down all paperwork in advance. It’s important to be aware of medical and dental visits and have all the information handy. It’s helpful to have your loved one’s previous years’ tax returns available to see the type of expenses they had in the past. If needed, you can obtain a transcript of income received the the individual from the IRS, which can help when filling out the 1040.”
Also, find out whether the following apply to your unique situation:
- Whether you are eligible to deduct insurance premiums. Not every policy is tax-qualified, especially when it comes to long-term care insurance. Check with the policy holder to make sure the policy qualifies and, if it does, you can deduct premiums as medical expenses.
- Determine whether assisted living entrance fees apply. If the community charges an entrance or initiation fee directly related to medical care, those charges are deductible.
Assisted Living Tax Preparation Resources
The following resources can provide more detailed assisted living tax preparation information:
- IRS Publication 502: Medical and Dental Expenses has a complete list of allowable expenses.
- IRS Publication 501: Exemptions, Standard Deductions and Filing Information to learn more about claiming the person with dementia as a dependent.
- Alzheimer’s Association: Detailed overview of tax deductions and credits that are available for out-of-pocket medical expenses paid by families caring for a loved one with Alzheimer’s at home.
- Assisted Living Federation of America: Detailed information about costs of assisted living.
- IRS.gov: Detailed overview of tax information for unique family situations.
If you are looking for additional tax tips, don’t forget to read our article on Senior Tax Credit.
Do you have tax tips for families looking for additional credits and deductions? Share them with us in the comments below.