Tax Deductibility of Assisted Living Costs
Much of the cost paid for assisted living is tax deductible to the resident (or a family member if the resident is a dependent). Such a statement is often a surprise to families considering assisted living services, and to many families already benefiting from such services. While we are not tax professionals, the information to follow is primarily from IRS documents and has been reviewed by our CPA firm. You should contact your tax adviser to determine the applicability to your situation.
IRS Publication 554, Tax Guide for Seniors states that
“You can deduct certain medical and dental expenses you paid for yourself, your spouse, and your dependents, if you itemize your deductions on Schedule A (Form 1040).”
The Publication also explains that “You can deduct only the amount of your medical and dental expenses that is more than 7.5% of your adjusted gross income”, shown on line 38, Form 1040. Often the items that can be deducted do not meet the 7.5% threshold. But with the inclusion of the full amount paid for assisted living, a significant deduction and tax reduction can be obtained.
To determine what is deductible as medical and dental care expenses, IRS Publication 502, Medical and Dental Expenses, is an authoritative resource. This publication addresses both the medical and meals/lodging components of services provided. While there has been little question about the deductibility of medical services, it also cites that “you can include in medical expenses the cost of medical care in a nursing home if a principal reason for being there is to get medical care.” Medical care includes Qualified Long Term Care Services that meet the definition, “required by a chronically ill individual and provided pursuant to a plan of care prescribed by a licensed health care practitioner.” The publication’s description of chronically ill is,
“If within the previous 12 months, a licensed health care practitioner has certified that the individual meets either or the following descriptions:
1) He or she is unable to perform at least two activities of daily living without substantial assistance from another individual for at least 90 days, due to a loss of functional capacity. Activities of daily living are eating, toileting, transferring, bathing, dressing, and continence.
2) He or she requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment.”
Additional guidance on the definition of the above terms is available, but again, this should be discussed with your tax adviser.
Assuming you and your adviser conclude that you meet the criteria above, you could have an additional tax deduction in the amount of the fees paid for assisted living services. For example, if you are paying $3,000 per month, this would amount to an annual amount of $36,000. If other deductions are near the 7.5% threshold, your tax benefit, at a tax rate of 15%, would be $5,400. While variations on these assumptions will change the amount of savings, the potential is very significant, approaching monthly savings of $450 or more! Again, consult your tax adviser.