If you reviewed President Trump’s proposed tax plan, a few things likely stood out.
First, its brevity. The current federal tax code stretches across tens of thousands of pages; the proposal presented was striking in its conciseness, totaling roughly one page.
Certain elements of the plan drew broad support, such as eliminating the estate tax and reducing taxes for small businesses. But one proposal raised concern among residents of continuing care retirement communities (CCRCs, also called life plan communities), seniors, and others: eliminating most itemized tax deductions.
The Trump proposal would retain only a limited set of itemized deductions—charitable donations, certain retirement savings contributions, and mortgage interest—while removing most others. Treasury Secretary Steve Mnuchin described that change as a way to close “loopholes” and to help offset lower marginal tax rates for higher-income taxpayers.
On the surface, simplifying deductions might sound beneficial and could streamline tax filing for many. However, this change would have a significant downside for older taxpayers who currently rely on the medical expense deduction.
Fewer deductions for CCRC residents?
Under current law, taxpayers who itemize may deduct qualified medical expenses that exceed 10 percent of adjusted gross income (AGI). AGI is your gross income after allowable adjustments, such as certain retirement contributions. Eliminating most itemized deductions would effectively remove the federal medical expense deduction.
Today’s deductible medical expenses can include health insurance premiums (including Medicare premiums), long-term care insurance premiums, prescription costs, and out-of-pocket expenses for assisted living and nursing home care—costs commonly incurred by older Americans. The proposed plan would also double the standard deduction, which means some taxpayers with modest medical costs or limited deductions might benefit by taking the larger standard deduction even if the medical deduction were eliminated.
For CCRC residents, however, the elimination of the medical deduction could be especially meaningful. Currently, many seniors who itemize can deduct a portion of CCRC fees as pre-paid medical expenses. Entrance fees and monthly fees paid by independent living residents often represent a pre-payment for potential future assisted living or skilled nursing services—this is frequently true under Type A (lifecare) residency contracts and, to a lesser extent, Type B (modified) contracts.
Although CCRC entrance and monthly fees can be substantial—and often exceed rent for similarly sized housing without an embedded health-care promise—the ability to deduct part of these payments as medical expenses can reduce tax liability substantially for some residents.
The real-world impact of cutting medical expense deductions
We have a concrete example of how removing the medical expense deduction can affect taxpayers. In 2013, North Carolina enacted tax reform that eliminated the state-level medical expense deduction while preserving deductions for charitable contributions and mortgage interest. That change went into effect on January 1, 2014.
When residents filed 2014 state tax returns, many discovered how valuable the medical deduction had been. The average additional state tax for those affected was about $1,800—an average that masked considerably larger increases for some taxpayers.
Organizations representing older adults and CCRC residents—such as the North Carolina Continuing Care Residents Association (NorCCRA), which advocates for thousands of residents in non-profit CCRCs—pushed back. In response, the North Carolina General Assembly reinstated the state medical expense deduction in 2015.
A tax law change that could cost you
While it is uncertain whether the federal proposal would pass in its original form, the potential consequences are clear: if the medical expense deduction were removed at the federal level, many states that use the federal code as a model could follow suit, eliminating state-level deductions as well. That could increase tax bills for seniors and anyone facing high medical or long-term care costs.
If this possibility concerns you, consider contacting your elected Representatives and Senators to share your perspective.
Regardless of tax considerations, there are many reasons people choose CCRCs apart from potential deductions. For many residents, the peace of mind that comes with guaranteed access to a range of care services over time is invaluable. If you are researching CCRCs, use community research tools and speak with local advisors to evaluate contracts, fees, and the long-term financial and care implications before deciding.