The Silver Lining is in the Tax Break in Virginia

CcrcA little-known tax rule can help offset the cost of some retirement communities.

If you, your parent, or an elderly loved one is reaching the point where living alone is no longer an option – for medical reasons or otherwise –  it may be time to consider some type of assisted living, whether nursing home or retirement community. Increasingly, many families are looking at the “Continuing Care Retirement Community" (CCRC) option. Even though the CCRC may be pricier, a little-known tax strategy recently explained in Smart Money could make it more financially attractive.

What is a CCRC? As SmartMoney decribes it this way: unlike "a traditional nursing home, where you simply pay a monthly fee, residents enter into a long-term contract with a CCRC. In exchange for a one-time entry fee and ongoing monthly charges, the CCRC provides housing and a range of on-site services. When a resident's health and personal care needs become more acute, the level of service can be increased to include assisted living, long-term care and skilled nursing care. The big advantage is that the resident doesn't have to move as his or her needs change".

Interestingly, there is another advantage: a potential tax savings. Because part of the upfront and ongoing fees is to provide medical services – whether the resident uses them or not – a medical tax deduction may be available. This strategy was upheld in the 2004 Tax Court case, Delbert L. Baker v. Commissioner (122 TC 143, 2004).

Of course, medical expenses must exceed the applicable percentage of adjusted gross income in order to claim the deduction.  There is a temporary exemption for individuals age 65 and older until Dec. 31, 2016. If you are 65 years or older, you may continue to deduct total medical expenses that exceed 7.5% of your adjusted gross income through 2016. If you are married and only one of you is age 65 or older, you may still deduct total medical expenses that exceed 7.5% of your adjusted gross income.  This exemption is temporary, however. Beginning Jan. 1, 2017, the 10% threshold will apply to all taxpayers, including those over 65.

However, if you are considering a CCRC, it’s quite possible that your applicable expenses will exceed this threshold, since their fees, including the upfront buy-in, are usually quite high. Remember, too, that the percentage of costs that qualify as medical is determined by the aggregated spending of the facility itself, rather than the individual and their level of received care. The CCRC management should be able to give you estimates of the percentages, though you may have to ask for them. One assisted living facility in our area now refuses to provide this tax advice but there is an easy remedy, just get a doctor to provide a statement about your medical need.  That letter will serve as justification for the deduction. 

Remember, kids,  if you will pay some or all of your parent’s CCRC fees, you can claim the applicable percentage of the charges as a medical expense on your return – if you provide more than half of your parent’s support. It's important to know however, that these tax breaks are available only if the parent enters into a CCRC-like contractual lifetime care arrangement otherwise the IRS will not allow the deduction.

You can learn more about this topic as well as other strategies on our website under the tab entitled: elder law planning in Virginia. Be sure you also sign up for our complimentary e-newsletter so that you may be informed of all the latest issues that could affect you, your loved ones and your estate planning.

ReferenceSmartMoney (June 15, 2011) “A Tax Break for Retirement Community Costs

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