Tax time is stressful for everyone, but there may be some good news for seniors receiving medical care in their homes, assisted living communities or skilled nursing settings.
While not every expenditure is tax deductible, there are some savings to be had.
[READ Long-Term Care Facilities: Types and Costs]
Are Assisted Living and Other Senior Living Expenses Tax Deductible?
The short answer: Some of them.
“A misconception many people have is that anything related to senior living or care is tax deductible,” says Jonathan Gassman, principal at Prager Metis CPAs in New York City.
While some items are tax deductible, there are specific rules about how deductions can be taken.
The biggest of these, Gassman says, is that “an expense must be medically related, such as costs for diagnosis, cure, mitigation, treatment or prevention of disease or ailment and preferably prescribed or ordered by a physician but not always.”
In addition, medical expenses must exceed 7.5% of your adjusted gross income in order to qualify for a tax deduction. The IRS defines adjusted gross income as “gross income (including wages, dividends and capital gains) minus certain adjustments to income.”
Finally, it can “depend on the community and the level of care that person is in,” says Xan Smith, chief financial officer of Goodwin Living, a not-for-profit senior living company based in northern Virginia. For example, seniors in a nursing home may be able to deduct more of their expenses than someone living in an independent living community because nursing home care is typically related to medical necessity.
This is all to say that tax laws are complicated and your health, living and financial situation is unique. You should always check with a certified tax professional who can offer expert insight tailored to your specific circumstances.
[SEE: The Advantages of Assisted Living.]
Are senior medical care expenses deductible?
As complicated as tax law can be, the good news is that some medical expenses are tax deductible, including expenses for durable medical equipment. Examples of durable medical equipment include:
— Oxygen tanks.
— Wheelchairs.
— Catheters.
— Eyeglasses.
— Hearing aids.
— Dentures.
— Alternative therapies, such as acupuncture and chiropractic care.
— Prescription medications not covered by your insurance.
— Diabetic care, including blood-testing kits.
— Lodging or traveling to receive medical care.
If you have questions about which medical costs are deductible, the IRS has some resources available.
[READ What to Do When Medicare Stops Paying for Skilled Nursing Care]
Are Medicare Expenses or Other Benefits Tax Deductible?
Simply, no.
Any medical-related deductions only apply to your out-of-pocket costs. You can’t deduct any expenses that are covered or reimbursed by Medicare, Medicaid or other insurance. This also includes expenses you pay with the proceeds from a long-term care insurance account.
“A standard question we receive is whether long-term care benefits are taxable. This answer is, generally, no,” Gassman confirms. “Tax-qualified long-term care insurance benefits come to you tax-free. Insurance companies that pay long-term care insurance benefits are required by the Internal Revenue Service to provide claimants with a 1099 LTC form. Make sure you give this to your accountant as there are special forms to complete.”
Some other benefits may also be ineligible for deductions. For instance, if you receive a veteran’s benefit — such as “Aid and Attendance,” which provides monthly financial assistance to veterans and their surviving spouses for assisted living — the portion of your expenses that are covered by that benefit would not be tax deductible.
Independent Living: Are Any Senior Care Expenses Tax Deductible?
In short, there are no specific senior living-related tax breaks if you move into an independent living community. However, Gassman says, you may be able to deduct the cost for home care services you engage there, but only if these are medically related.
For instance, if you have a caregiver who helps withactivities of daily living, such as dressing, bathing, medication management or physical therapy exercises, these services may be deductible in some cases. However, only the payment for their time to provide medical care is deductible. That means that you may need to apportion their wages if they do other tasks, such as pet sit or drive you to the mall.
In addition, Smith notes that there are rules around the number of ADLs and how often they are rendered that can influence what’s tax deductible.
“You can see how it gets super complex,” he points out.
This is why it’s so important to talk with your tax advisor before you engage a home health aide for more than a few hours a week, Gassman says.
“The rules vary from state to state, but if you are paying someone to work in this capacity for a certain number of hours per week, you may be considered a bona fide employer and have to withhold and pay taxes on these wages,” he explains.
Hiring someone through an agency may alleviate some of those tax concerns because the agency might be considered the caregiver’s employer. However, it’s always best to check with the agency about your respective responsibilities.
Assisted Living: Which Expenses Are Tax Deductible?
In an assisted living community, fees may be tax deductible if an assisted living resident is chronically ill and medical care is prescribed by a licensed health care provider or physician.
To qualify as chronically ill, you must require substantial supervision and assistance with at least two ADLs or have a severe cognitive impairment, such as Alzheimer’s disease or another form of dementia. In this case, rent for the room and care may be tax deductible.
Nursing Homes: Which Expenses are Tax Deductible?
Many — but not all — nursing home expenses are tax deductible.
“The vast majority of the time, someone has been in skilled nursing because of a medical need,” Smith says. “So, that can be up to 100% deductible.”
This means any out-of-pocket costs you incur for skilled nursing home care are usually tax deductible because the main reason for admission to such a facility is to receive medical care and services. However, any add-ons to your bill that are not medical, such as costs for hair or nail care and cable television fees, cannot be deducted, even if you pay out of pocket for these.
Memory Care: Which Expenses Are Tax Deductible?
As with nursing home care, memory care is generally undertaken because of a chronic medical need.
“So, if somebody is in a memory care facility to ensure that they stay safe, they may not have as many medical needs, but the cognitive issues have necessitated their being in a memory care facility,” Smith explains.
In an instance like that, the care would be tax deductible.
Continuing Care Retirement Community: Which Expenses Are Tax Deductible?
If you enter a continuing care retirement community, or CCRC, which generally has independent living, assisted living and skilled nursing care on the same campus, portions of entry fees and monthly fees that apply for medical care may be tax deductible.
With any of the above, if you are going to take an income tax deduction on your tax return, it’s critical to keep accurate records and receipts to support any deduction you claim on your income tax return.
Tax Tips for Senior Living: The Benefits of Itemizing Senior Care Expenses
Because the standard deduction in the tax code increases year by year, many people no longer itemize deductions on their taxes, Gassman says. However, if you have significant medical expenses, there could be an advantage and huge tax savings in itemizing.
According to the IRS, the standard deduction for tax year 2023 is $14,600 for an individual. If you are 65 or older, you get an additional $1,550. This would bring your total standard deduction to $16,150.
If you itemize and your deductions exceed the standard deduction, you could save a good bit of money. However, remember that your total annual medical expenses “must exceed 7.5% of your adjusted gross income in order for you to claim these deductions,” Gassman notes.
Example tax scenario
Gassman uses the example of his own 96-year-old mother for a situation any senior might face. She lives in her own home and has long-term care insurance that pays approximately $10,000 per month for her medical care. This money is not taxable as income. However, there must be documentation that the funds are used for her medical care.
The long-term care insurance is running out, so she will need to take money out of her Individual Retirement Account to help pay for care. The money she withdraws from her IRA account will be taxable. For the most part, any medical expenses she pays will be tax deductible.
“It can be confusing, so it’s best to seek guidance from your tax advisor to help you weigh the drawbacks and benefits of withdrawing money from various types of accounts and investments to pay for medical care, especially after retirement,” Gassman says.
Should You Make Your Parent a Dependent?
There may be a tax benefit for adult children helping to support a parent.
“If you provide over 50% of their support and they don’t earn more than $4,400 per year, you can claim your parent as a dependent,” says Edward Nisanov, CEO and owner of New York-based Nisanov Tax Group.
You get a $500 deduction for each exemption, and you also may be entitled to deduct the medical expenses you pay that exceed 10% of your adjusted gross income.
Nisanov adds that even single people with no children who declare a parent as a dependent can also claim head-of-house status.
“This means a larger standard deduction than if they were to file without this designation,” he explains.
Bottom Line
Some senior living medical expenses may be tax deductible, and those deductions can add up.
“It won’t pay for all the costs — senior care is very expensive — but it will help. That’s why I think that people should take advantage of tax deductions they’re eligible for,” Smith says.
In doing so, he urges seniors in these situations to talk to experts.
“Accessing medical care is so complex to begin with, and then you layer this on,” he says. “So, ask for help, either from the community or outside advisors. Oftentimes, there’s free resources they can access,” via a local senior center or your local Area Agency on Aging.
More from U.S. News
Does Medicaid Pay for Assisted Living: What Is Covered and What’s Not
Nursing Homes vs. Assisted Living: What Are the Differences?
Medicare Allowance Explained: What You Need to Know
Are Assisted Living and Other Senior Living Expenses Tax Deductible? originally appeared on usnews.com
Update 05/13/24: This story was previously published at an earlier date and has been updated with new information.
