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Senior living – deductibility and reimbursement

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Deciding to put a loved one in a long-term life care facility can be stressful, but things tend to get even more complicated when it comes time to prepare his or her tax returns or trying to figure out how you will afford the services he or she needs.

LGT would like to reassure you that you are not alone when determining what needs to be handled and how’s best to go about it. IRS Publication 502 discusses medical and dental expenses. Revenue Ruling 75-302 explains the deductibility of lump-sum payments, such as entrance fees, as they relate to medical and dental expenses, as well as the tax impact of reimbursements of such payments. However, these explanations are complex, so let’s talk about it in a way we can all understand it.

First and most important to understand is that only medical expenses can be deducted. The IRS defines these as “costs of diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body (Section 213 (d)(1)(A)).”  A resident of a senior living facility may deduct costs of living in the facility only to the extent that they relate to medical expenses (Scott R. Fouch, 2014). This includes the portion of lump-sum payments attributable to medical expenses.

If you are age 65 or older, these costs are deductible so long as they exceed 7.5 percent of your adjusted gross income (AGI). The floor is 10 percent of your AGI if you are under the age of 65.

For example for someone born before Jan. 2, 1949:

  • AGI = $40,000
  • Qualified medical expenses = $10,000
  • 7.5 percent of $40,000 = $3,000
  • $10,000-$3,000 = $7,000 that can be deducted

IRS Publication 502: Medical and Dental Expenses can give you more insight on how your deductions and reimbursements may differ because you are claiming a parent as a dependent, filing as head of household, selling his or her home or are in need of using a reverse mortgage.

Then, there is the issue of how to calculate long-term-care insurance premiums into your deduction. Certain limitations have been set depending on the senior’s age. The IRS Revenue Procedure: 2013-35 provided the 2014 long-term-care insurance federal tax deductible limits below.

.24 Eligible Long-Term Care Premiums. For taxable years beginning in 2014, the limitations under § 213(d)(10), regarding eligible long-term care premiums includible in the term ”medical care,” are as follows:

Attained Age Before the Close of the Taxable Year Limitation on Premiums
40 or less $370
More than 40 but not more than 50 $700
More than 50 but not more than 60 $1,400
More than 60 but not more than 70 $3,720
More than 70 $4,660

 

 

 

 

Lastly, many care facilities will require a lump-sum payment in order for the resident to be allowed entry and to receive lifetime care. It is important to know that the money invested into an entrance fee of a life-time care facility may be partially reimbursed upon termination (Scott R. Fouch, 2014). In this case, you must combine in your income the refunded portion of an entrance fee to the extent you have previously deducted as medical expenses.

If you are still experiencing trouble understanding the various difficulties of funding for your loved one’s long term care, please contact your trusted CPA at LGT or Landon M. McAfee at lmcafee@lgt-cpa.com.

References
IRS. (2013). Publication 502 . Retrieved from Internal Revenue Service: http://www.irs.gov/publications/p502/ar02.html#en_US_2013_publink1000178856
IRS. (2014). Revenue Procedure 2013–35. Retrieved from Internal Revenue Service: http://www.irs.gov/irb/2013-47_IRB/ar11.html#d0e836
Rev. Rul. 75-302. (1975, July ). Retrieved from http://infoassist.panpha.org/docushare/dsweb/Get/Document-9856/PP-IRS-REV_RUL_75_302.pdf
Scott R. Fouch, C. P. (2014). Prepaid Medical Expenses and Continuing-Care Facilities . Today’s CPA , 36-39.
Section 213 (d)(1)(A). (n.d.). Retrieved from Internal Revenue Code of 1954: http://uscode.house.gov/view.xhtml?req=%28section+213+%28d%29+%281%29+%28a%29%29+AND+body%3A%28costs+of+diagnosis%2C+cure%2C+mitigation%2C+treatment+or+prevention+of+disease%29&f=treesort&fq=true&num=5&hl=true&edition=prelim&granuleId=USC-prelim-title26-s