It’s that time of year again—tax season. If you’re thinking about moving into a continuing care retirement community (CCRC), also called a life plan community, there’s an important tax detail to consider: many new CCRC residents can qualify to deduct part of their entrance fee and monthly fees as medical expenses.
CCRC tax deductions
CCRCs offer a range of residential options, from independent living to assisted living and skilled nursing care. Most require a substantial one-time entrance fee followed by monthly fees, paid in exchange for access to lifelong medical and long-term care services.
While entrance fees and monthly charges at CCRCs are often substantial and may be higher than rent for a comparable non-care residence, seniors who itemize their deductions may be able to claim a portion of these expenses as deductible medical costs.
Legal and tax analyses have concluded that portions of entrance fees and monthly fees paid by independent living residents of a CCRC or other lifetime care facility are deductible when they represent prepayments or charges for future assisted living or skilled nursing care. This treatment commonly applies to Type-A (lifecare) contracts and, in many cases, to Type-B (modified) contracts.
Some Type-C (fee-for-service) contracts may also qualify in certain circumstances. In those cases, providers sometimes use a subsidy or actuarial approach to calculate the deductible portion: if entrance fees and independent living monthly fees are used to subsidize assisted living and skilled nursing operations, the amount attributable to that subsidy may be treated as a prepaid medical expense. One method is to divide the annual subsidy required to operate assisted living and skilled nursing by the number of independent living residents, then multiply by the average life expectancy of those residents to estimate the deductible portion.
Move now and save more
If you are considering a move to a CCRC, acting sooner can be beneficial from a tax perspective.
Deductible medical expenses include items such as health insurance premiums (including Medicare), long-term care insurance premiums, prescription drugs, assisted living and nursing home care, and other out-of-pocket health-related costs. The tax rules governing medical expense deductions have changed over time. For tax years beginning in 2013, the adjusted gross income (AGI) threshold for deducting medical expenses was raised to 10 percent of AGI. Prior to that change, the threshold was 7.5 percent of AGI.
Congress temporarily exempted taxpayers age 65 and older from the 10 percent threshold increase through 2016, meaning eligible seniors could continue to use the 7.5 percent threshold for tax years ending before January 1, 2017, provided the taxpayer or spouse was age 65 or older during or before the tax year. Under that lower threshold, medical and dental expenses exceeding 7.5 percent of AGI could be deducted on Schedule A.
For example, a taxpayer age 65 or older with an AGI of $100,000 could deduct medical and dental expenses above $7,500 (7.5% of $100,000). For many seniors, a CCRC’s entrance fee and monthly payments can push total medical-related expenses past that threshold, potentially creating a sizable deduction if the costs meet the IRS criteria.
Do your due diligence
This information is intended to explain general principles and should not be taken as tax advice. Tax rules, court decisions, and IRS guidance affecting the deductibility of CCRC fees can change. Consult a qualified tax advisor who understands CCRCs to determine whether you qualify for a deduction and how to document it properly. Ultimately, taxpayers are responsible for the accuracy of any deductions claimed on their returns.