Many U.S. taxpayers are familiar with the medical expense tax deduction. Far fewer taxpayers realize that a portion of their Continuing Care Retirement Community (CCRC) expenses may qualify as medical expenses, regardless of the taxpayer’s health. CCRCs typically have two main types of potentially deductible medical expenses: a one-time entrance fee and ongoing monthly fees.
Medical expense deductions have long been available to U.S. taxpayers. The United States Revenue Act of 1942 first allowed for medical expense deductions. However, early proposals of the recent Tax Cuts and Jobs Act (TCJA) threatened to eliminate this deduction. Thankfully, the enacted version of the TCJA allowed taxpayers who itemize medical deductions to continue to do so, albeit with some small changes. (See A Summary of The Tax Cut and Jobs Act of 2017)
Prior to the TCJA, the threshold for qualifying medical expense deductions was 10% of adjusted gross income (AGI). The TCJA lowered that number to 7.5% of AGI, but only for 2017 and 2018. In 2019, medical expenses must again exceed 10% of AGI in order to be deductible. Despite the higher threshold, qualifying medical expenses can still be a very valuable itemized deduction for some taxpayers.
For taxpayers who live (or plan to live) in a CCRC, it is important to make your CPA aware of both your CCRC entry fee and monthly fees. A significant portion of both could be deductible as a qualified medical expense, even with 2019’s higher AGI hurdle.
Regardless of your health, a portion of your CCRC entry fee is likely considered a qualified medical expense. Residents may be eligible to receive a one-time deduction for the non-refundable portion of an entrance fee in the year paid, even if they are living independently. While the IRS does not provide definitive guidance on how to calculate the deduction (only that taxpayers must use a reasonable approach), it acknowledges that a portion of the lump sum entrance fee qualifies as medical care. CCRCs typically provide residents with the percentage of their entrance fee related to medical care (either directly or via the CCRC’s accounting firm). Again, this percentage deduction should only be applied to the non-refundable portion of the entrance fee paid. Also note that the deduction can vary dramatically from one CCRC to another.
Monthly fee medical deductions are generally much more dependent on residents’ health and level of care. While only a small portion of independent living monthly fees may qualify as medical expenses, up to 100% of assisted living and healthcare monthly fees may be deductible. Many CCRCs send residents an annual Medicare Expense Deduction Memorandum or similar letter outlining allowable deductions. However, they are not required to furnish this information. It is important to confirm whether this is a service your CCRC provides. When they do provide this service, the CCRCs almost always advise residents to consult with their CPA or tax advisor. We strongly encourage the same. For instance, these qualified medical expenses may need to be reduced by any long-term care insurance benefits received by the resident/taxpayer.
One other thing to keep in mind is that these qualified medical expense deductions are only available to taxpayers who itemize deductions. Fewer taxpayers will itemize, instead taking the standard deduction that was doubled by the TCJA. You can read about that in the aforementioned article. For those who will itemize deductions, however, these medical deductions can result in significant tax savings.
In summary, medical expenses continue to be a major potential itemized deduction for CCRC residents. Clients considering moving to a CCRC should raise this question as part of the CCRC interview process. Deductions will vary from one resident to the next and from one CCRC to the next. While we defer to your tax advisor and CCRC regarding qualified medical expenses, we can certainly assist with the affordability aspect of a CCRC decision, among other things. Please call or come by to discuss planning for you and your family as you consider your next stage of life. As always, thank you for choosing Bragg Financial Advisors.
This information is believed to be accurate but should not be used as specific investment or tax advice. You should always consult your tax professional or other advisors before acting on the ideas presented here.