Over the past months since COVID-19 changed daily life, I’ve presented dozens of webinars for people exploring retirement communities across the country. One of the most frequent questions during Q&A sessions concerns tax deductions for entry fees and monthly fees charged by continuing care retirement communities (CCRCs), also known as life plan communities.
It has been some time since I last covered this subject, and there have been a few important developments affecting qualification for these deductions. Below is an updated, plain-English summary to help prospective residents and their families understand when and how a portion of CCRC charges may be deductible.
Understanding CCRC entry fee and monthly fee tax deductions
Many CCRCs require a one-time entry fee upon move-in. Entry fees vary widely by community and contract type, from under $100,000 in some places to several hundred thousand dollars in others. Depending on the residency contract, part of that entry fee may be refundable if you move out or as a payment to your estate after death.
What some people don’t realize is that residents who pay entry fees to “entry fee” CCRCs may be able to deduct a portion of that fee — and in some cases a portion of monthly service fees — as a prepaid medical expense on their federal income tax return. The deductible amount depends heavily on the specific type of residency contract you sign.
For tax purposes, a portion of the entry fee or monthly fee is deductible only if the community accounts for it as a prepaid healthcare expense. This is typically true for lifecare contracts (often called Type A contracts) and, to a lesser extent, for modified fee-for-service contracts (Type B). In some situations a fee-for-service contract (Type C) may allow a deduction if the community can clearly document that part of the fees are used to subsidize residents’ healthcare services.
Nonrefundable portion only — refundable parts do not qualify
Only the nonrefundable portion of an entry fee can be treated as a prepaid medical expense for deduction purposes. Any refundable portion must be excluded when calculating the deductible amount. If a resident deducts an entry fee that later turns out to be refundable under a return-of-capital arrangement, that refunded amount could be taxable as income in the year it is returned.
As a practical rule of thumb, many lifecare contracts result in an allowable deduction roughly equivalent to 30–40 percent of the entry fee, though the exact percentage varies by community and contract language. A CCRC’s auditor or chief financial officer can usually supply a recommended allocation or formula each year to help residents determine the deductible portion; many communities provide written guidance for tax reporting before tax season.
Likewise, depending on the contract type you choose, a portion of the monthly service fee may be deductible as a medical expense. The percentage of the monthly fee that qualifies is often similar to the percentage applied to the entry fee, but you should rely on the community’s written statement or financial officer for the precise figure.
How recent tax law changes affect deductibility
Two tax-law changes in recent years have altered how many people can claim medical expense deductions, including deductions related to CCRC fees. First, since 2020 the threshold for deducting medical expenses is 10 percent of adjusted gross income (AGI) for taxpayers who itemize. In 2019 the threshold was 7.5 percent of AGI, so the increase means a higher floor before medical expenses are deductible. To date this 10 percent threshold remains in effect.
Second, the standard deduction was substantially increased by tax law changes enacted in 2017. Higher standard deductions mean fewer taxpayers itemize deductions at all. For example, the standard deduction amounts rose significantly for single filers, heads of household, and married couples filing jointly, and these higher amounts remain in place for recent tax years.
Because the medical expense deduction is available only to those who itemize, these two changes together mean fewer taxpayers will both itemize and exceed the medical-expense threshold needed to deduct CCRC fees. That said, there are situations where itemizing in the year you enter a CCRC still makes sense: the entry fee can produce a substantial one-time deduction that may push total itemized deductions above the standard deduction for that tax year. If that occurs, it may be optimal to itemize in year one and then revert to the standard deduction in subsequent years.
One additional point: if an adult child pays an entry fee, or part of it, the child may be able to claim a medical expense deduction for the amount paid on behalf of the parent, provided other tax rules and dependency/support tests are met. Whether the child qualifies to claim such a deduction depends on multiple factors, including the degree of financial support provided to the parent and the child’s tax filing situation, so this is not automatic.
Work with a tax professional
The material above is informational and not a substitute for personalized tax or financial advice. Tax treatment can vary based on the exact contract language, how the CCRC accounts for fees, your overall tax situation, and current tax law. Always consult a qualified tax professional or CPA familiar with CCRC deductions to analyze your specific circumstances and to determine whether you should itemize or claim a deduction related to entry or monthly fees.
When evaluating a community, be sure to request the written tax allocation the CCRC provides for entry and monthly fees each year, and keep documentation from the community that explains what portion of fees are treated as prepaid healthcare expenses. That documentation will be essential when preparing your return or when discussing options with your tax advisor.