At myLifeSite we often receive questions about whether residents of continuing care retirement communities (CCRCs or “life plan communities”) can claim medical expense tax deductions. Below we explain how this deduction works, how it may apply to CCRC residents, and what to discuss with your tax preparer. This article is informational and not a substitute for professional tax advice.
What is the medical expense tax deduction?
The medical expense tax deduction lets you deduct qualifying medical expenses that exceed a set threshold of your adjusted gross income (AGI). For tax years when the threshold is 7.5% of AGI, you may deduct the portion of your total medical costs that exceeds 7.5% of AGI. Only expenses above that percentage are deductible, and you must itemize deductions on your tax return to claim it rather than taking the standard deduction.
Note: Thresholds can change. For example, the threshold was adjusted to 10% in 2017 for certain tax years. Confirm the current threshold with your tax advisor or IRS guidance for the year in question.
How the deduction can apply to CCRC residents
Many people assume medical expense deductions only apply if you receive ongoing nursing or medical services, but some CCRC residents who live in independent living can still qualify. That’s because parts of certain CCRC fees—such as an initial entrance fee paid in year one and ongoing monthly fees—may be allocated by the community as prepayments for future medical care. When a portion of your fees is treated as prepaid medical expenses, those amounts can count toward your annual medical expenses for deduction purposes, if they push your total over the AGI threshold.
The likelihood that part of your fee is classified this way depends heavily on the type of residency contract. Lifecare contracts (often labeled Type A) and many modified fee-for-service contracts (Type B) commonly include a prepaid healthcare component. Fee-for-service contracts (Type C) generally do not include a prepaid care component, though in rare cases an organization might document a small portion of fees used to subsidize care that could be deductible.
>>Learn about CCRC residency contract types
Does nonprofit status matter?
A community’s tax status—whether it is for-profit or nonprofit—does not determine whether you can claim a medical expense deduction. The deduction is based on your personal qualifying medical expenses, your AGI, and how the community allocates fees under your residency contract. Any implication that only nonprofit CCRCs allow deductions is incorrect.
How to calculate and document the deduction
CCRCs often operate in a pooled model where many residents’ payments help cover the medical costs of those who need care. Communities typically determine annually what portion of fees is designated for prepaid medical care based on their budget and expenses. Many CCRCs provide residents with a yearly statement or letter specifying the amount eligible to be treated as a medical expense. Share that documentation with your CPA or tax preparer so they can include the correct figure on your tax forms along with any other qualifying medical expenses for the year.
Because the calculation and treatment of these fees can be complex, and tax rules change over time, consult your tax or financial professional before claiming any deduction. They can confirm whether amounts reported by the community qualify for deduction in your specific situation and ensure correct filing.
This article is intended to raise awareness of a potential deduction for CCRC residents and is not tax advice. Contact a qualified tax professional for guidance tailored to your circumstances.