Taking Advantage of the Medical Expense Tax Deduction as a Ccrc Resident

Did you know a portion of the fees retired citizens pay to a Continuing Care Retirement Community – or CCRC – are tax-deductible? Join me as I walk through how to take advantage of those tax deductions on institution fees.

First, let’s define what is a Continuing Care Retirement Community

CCRCs are retirement communities that offer multiple housing and personal care opportunities.  A single community may offer independent living, assisted living, and skilled nursing home or memory care living options. Residents of CCRCs often pay a large entrance fee when they enter the facility, along with ongoing monthly fees. These fees allow residents to move from one level of care to another as their needs for care change over time. They also guarantee a resident’s housing and medical care for their lifetime, taking into account the resident’s aging and evolving medical care requirements.

So how are CCRC residential fees tax-deductible?

Unbeknownst to many, the Internal Revenue Service (IRS) has determined that portions of CCRC monthly and entrance fees are deductible for certain individual taxpayers — if the fees are shown to be attributable to medical care and expenses. These potential tax benefits can greatly offset the upfront and continuing costs of CCRC residency.

If you’ve paid a CCRC entrance fee, made monthly CCRC payments, or are exploring CCRCs as an option for retirement living, you may qualify to take advantage of tax deductions on the fees paid to that institution.

Applying the Medical Expense Deduction to CCRC Fees

Generally, the Internal Revenue Code allows an individual taxpayer to deduct any expenses that are paid during the taxable year for their own medical care, his or her spouse and dependents, as well as expenses that are not compensated for by insurance.  The term, “medical care,” includes diagnosis, cure, mitigation, treatment, or prevention of disease or injury.

However, in 2016, the IRS clarified that medical expenses include medical expenses paid to a retirement home in either a lump sum as an entrance fee or as continuing monthly payments. This is part of section 213 in the Internal Revenue Code.

The IRS’s rationale is this: Although payments to CCRCs are in lump sums that are used to satisfy housing, food, and other expenses, a portion of the lump sum and monthly fees are designated specifically for medical care.  Ongoing medical care is a staple of living in a CCRC, and the IRS officially acknowledges this by allowing a portion of the CCRCs fees to be deductible as medical expenses.

So How Do I Determine Eligibility And The Percentage I Can Deduct?

In order for a CCRC resident taxpayer to deduct a portion of the non-refundable entrance fee and monthly fees, residents must have signed an agreement with the CCRC that provides lifetime medical care.  Additionally, there are other important factors when determining eligibility for the deduction:

1. The medical expense deduction only applies to individual taxpayers who elect to itemize their deductions, rather than take the standard deduction.
2. A taxpayer can deduct only the portion of their medical expenses that exceed 7.5 percent of the taxpayer’s adjusted gross income.

What if I meet all those requirements? How do I determine the percentage of CCRC fees that are attributable to medical care and expenses?  

That’s a great question.

Susan Stoddard, the president of Stoddard Financial Services and a former vice president of finance at a CCRC in West Michigan, explains it is the resident’s responsibility to reach out to their respective CCRC for the relevant financial information.

“CCRCs are not required to provide the percentage of CCRC fees that are attributable to medical expenses in a given year,” Stoddard said. “This means that a taxpayer may need to work directly with the CCRC to obtain this information.”  

Unfortunately, there is no set formula a CCRC is required to use to determine the deductible percentage, according to Stoddard. However, many CCRCs are accustomed to providing this information to their residents on an annual basis.  

“It is a benefit to both the CCRC and their residents for the CCRC to calculate the percentage of yearly expenses attributable to medical costs,” said Stoddard. “It can be a great marketing tool for CCRCs to promote this unknown tax benefit to potential residents.”

If your CCRC does not provide the necessary financial information to you on a yearly basis, it is important that you reach out to your CCRC’s CFO.  They may be able to determine this number internally, or they may have to reach out to an actuary or CPA for review.

So What Does All This Mean?  

With the new 2018 tax law going into effect, many taxpayers are choosing the standard deduction instead of itemizing deductions.  However, by talking with your tax preparer, you may determine that itemizing deductions still provides a great benefit to you if the CCRC fees exceed 7.5 percent of your adjusted gross income and result in a sizable deduction.

If you are looking for long-term care for yourself or a loved one, you may have more options than you realize.  It is important to understand the different legal and financial aspects of entering into senior housing as you consider eldercare options.  If you are a current CCRC resident, you may need to work with your CCRC to obtain the financial information that is required to calculate your potential tax deduction. We recommend working with your financial and legal advisors to make sure you are taking advantage of the potential tax deductions associated with CCRC medical expenses.

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Levine & Levine specializes in estate planning and elder law and has experience representing clients who reside in Continuing Care Retirement Communities and other senior housing facilities or are planning a transition into senior living.