There is a little-known tax advantage enjoyed by some residents in Senior Living. Specifically, Assisted Living and Memory Care expenses may be tax deductible. This is about the only good news associated with the question of how to pay for long-term care. How much of these expenses are deductible, and by how much will it reduce your taxes? Unfortunately, the vague answer to this question is: “it depends”.
Let’s start by understanding that we are not tax accountants, and every person’s situation is different. This article will give you some general guidelines and recommend that you visit your tax accountant for specific answers as to how much money this may save you at tax time.
First, Assisted Living expenses may be considered a medical expense. If someone can claim un-reimbursed medical expenses in excess of 7.5% of their adjusted gross income, then they can deduct the medical expenses from their income. Given that the average person in the U.S. living in an Assisted Living is charged around $54,000 per year, the 7.5% threshold seems quite easy to satisfy.
Second, ALL of your Assisted Living expenses can be deducted if a person is considered “chronically ill,” defined as requiring assistance with two of six Activities of Daily Living (“ADLs”), or if a person has severe cognitive impairment. I’m going to estimate—without any hard data to back it up—that these two criteria defining someone as chronically ill would mean that about 80% of Assisted Living residents and all Memory Care residents can deduct ALL of their long-term care expenses as medical expenses.
CARE COSTS AT HOME
Third, if you don’t meet the “chronically ill” threshold, SOME of your Assisted Living expenses can still be deducted. How much of your Assisted Living charges can be deducted is difficult to say, and will depend on a variety of factors—including how aggressive is your tax accountant. But I wouldn’t be surprised if it were above 50% of your Assisted Living bill. Personal assistance care costs at home may also qualify as medical expenses, as can long-term care insurance premiums.
It seems unlikely any Independent Living community charges are allowed to be included as a medical expenses deduction, though care costs from an outside Personal Assistance Services agency while living in Independent Living should largely qualify for the medical expense deduction.
PARENTS AS DEPENDENTS
Finally, it is sometimes possible for family members to use this write-off on their taxes. This happens when you can claim your parents as dependents. Parents are dependents when a family member provides over 50% of their parents’ support and care costs, and can then also meet the 7.5% threshold for itemizing medical expenses.
Determining what part of the cost of assisted living is tax deductible is complicated and requires consultation with your tax advisor. Our goal is to alert families to the possibility of this tax advantage, and we hope it saves money on your or your parent’s tax returns.