Seniors may qualify for hefty tax breaks if they move into a retirement community that offers assisted living and skilled nursing support as part of what are considered lifetime-care benefits. If their children or other family members provide major financial support for entrance fees and monthly expenses, they might also be eligible for tax deductions.
Many seniors and their families are not aware of this tax benefit, according to Jerry Grant, executive vice president and chief financial officer of ACTS Retirement-Life Communities. ACTS is based north of Philadelphia and operates 23 continuing care retirement communities in eight eastern and southern states. But he says virtually all ACTS residents use the benefit once it's explained to them.
"In communities where a senior is contracting for services that include healthcare," he explains, "if the contract is obligating the provider for those services, and if the contract includes a non-refundable entrance fee, then that fee is viewed by the IRS as a pre-payment expense for healthcare services."
If entrance fees are fully or partially refundable, which is the case at many CCRCs, the expense deduction only applies to that portion of the fee which is not returned to the resident or their estate, Grant explains. Some CCRCs have fully refundable entrance fees but even more have a sliding scale, in which entrance-fee refunds decline with each month of residency, and disappear altogether in several years.
In cases where fees are partially refundable, Grant said, residents can take the full tax deduction at the time they pay the entrance fee. But either the resident or the resident's estate would be liable to return a portion of the tax deduction if he or she doesn't reside in the community long enough for the refund period to expire.
In addition to entrance fees, a portion of monthly residential fees at CCRCs may also be tax deductible. The logic underlying both deductions is that payments entitle residents to lifetime health care as part of their residential agreement, so a portion of their expenses really represents the cost of future healthcare benefits.
Some CCRCs have rental contracts for independent living arrangements, with "pay as you go" fees when residents need assisted living and nursing services. In those situations, only payments expressly required for medical services would be tax deductible.
The percentage of CCRC payments that may be deducted from taxable income ranges between 30 to 40 percent throughout the country, Grant estimates. It varies by CCRC because communities have different expense structures. At ACTS communities, he says, 36.18 percent of entrance fees and 38.61 percent of monthly fees are deductible this year as prepaid healthcare expenses.
ACTS provided a sample case study of how the tax benefit would work at ACTS, where entrance fees are not refundable. The example is for a couple paying a $250,000 entrance fee and monthly fees of $3,500, which provides them a two-bedroom apartment and access to assisted living and skilled nursing services should they need them. The couple is assumed to be in a 20 percent federal income tax bracket.
Of the $250,000 entrance fee, $90,450 (36.18 percent of $250,000) would be considered a qualifying medical expense. Only medical expenses above 7.5 percent of adjusted gross income may be deducted from income taxes, so the amount of the deduction will depend on the couple's taxable income and whether they have any other qualifying medical expenses.
For a couple reporting $100,000 of taxable income (from Social Security, pensions, and investment earnings, for example), only medical expenses above $7,500 could be deducted. If the couple had no medical expenses other than their CCRC entrance fee, they could deduct $82,950 ($90,450 minus $7,500) from their taxable income. If they were in the 20 percent tax bracket, this would save them $16,590 in the tax year during which they paid the entrance fee.
On an ongoing basis, tax deductions for the monthly fees would work the same way. If the fees totaled $42,000 in a tax year (12 times the monthly fee of $3,500), $16,216 of that amount (38.61 percent of $42,000) would be a deductible medical expense. If the couple had no other medical expenses, the net value of the deduction would be $8,716 ($16,216 minus $7,500). That would be worth $1,743 in tax savings for someone in the 20 percent income-tax bracket. In practice, most people have additional medical expenses, so the CCRC tax benefit would yield larger tax savings.
Increasingly, Grant said, children are stepping up to help their parents with CCRC expenses. "They often are paying for the entire entrance fee," he explained. "It's basically a gift from the children to the parents, where the children are saying, in effect, 'It's our turn for us to take care of you.' This has become a lot more common in the past decade."
Grant says if children or other family members provide more than half the total financial support of their parents, they can deduct a portion of the CCRC entrance fees paid for their parents. ACTS advises consumers to consult with their advisers or tax preparers to determine the best way to benefit from the tax deductions.
Despite this advice, Grant said, many financial advisers and attorneys are not familiar with the medical tax deductions linked to CCRC fees. "Many of the tax preparers and accountants are more familiar with it," he said, "but they are not the ones who provide counseling in the upfront stage of this process."