Tax Benefits of Senior Living

If you’re considering moving to a senior living community, there are tax benefits you may not know about – and they could mean substantial savings for you.

Medical Expense Deductions
What Qualifies as a Medical Expense
Tax Tips from an Expert
Did You Know: The Most Tax-Friendly States for Retirees

Health issues – and their associated costs – can increase as you age, so it pays to know what tax benefits you can take advantage of.

Medical Expense Deductions

The medical expense deduction is designed for people with health care-related expenses higher than a certain percentage of their adjusted gross income (AGI). In 2015, the latest data available from the IRS, out-of-pocket medical expenses of tax filers of all ages averaged $15,243, which is more than a quarter of the estimated median household income.

The 2017 tax reform bill made some changes to the amount of medical expenses you can deduct.

  • On your 2017 and 2018 taxes, you can deduct unreimbursed medical expenses that exceed 7.5% of your AGI.
  • In 2019 and beyond, you can deduct medical expenses that are more than 10% of your AGI.

So, if you currently have an AGI of $100,000, you can currently deduct medical expenses over $7,500. After 2018, you can only deduct expenses over $10,000.

To claim these deductions, you must itemize your tax returns.

What Qualifies as a Medical Expense?

The good news for residents of a senior living community is that they may get a substantial tax break.

At most Life Plan Communities (also known as Continuing Care Retirement Communities), you pay a one-time entrance fee and then monthly fees based on the size of your residence and the number of occupants. Because the entrance fee essentially helps pay for medical and long-term care services, you may be able to deduct a portion of those fees as a medical expense on your federal tax return.

Residents of assisted living and memory care communities may also qualify for these deductions if they’re receiving long-term personal care services or need constant supervision. These residents must have been certified as chronically ill within the previous 12 months by a licensed health care practitioner, and have a plan of care that outlines the specific daily services received.

There are other medical deductions you may claim, whether you live in a retirement community or not. These include, but aren’t limited to:

  • Out-of-pocket costs for hospitalization, doctors, psychiatrists, podiatrists, or other medical services not covered by Medicare or other insurance.
  • Dental care, prescriptions, copays, eyeglasses.
  • Premiums for qualified long-term care insurance, and health insurance premiums not paid for with pre-tax dollars.
  • If required for medical care, you may also be able to deduct the costs for housing, food, clothing, transportation to the doctor and some home modifications.
  • Programs for weight loss, alcohol treatment or smoking cessation may be deductible if they’re part of a treatment for a specific disease. Wigs for hair loss due to medical treatments or conditions may also be deductible.

Tax Tips from an Expert

Christopher Karachale, partner and tax attorney at Hanson Bridgett, LLP, recommends talking to your tax preparer about medical expense deductions. “If you have any questions, ask,” he says. “Don’t just assume something is or isn’t deductible.”

It’s also important to ask whether it makes sense for you to claim the standard deduction rather than itemizing medical expenses. That’s because the standard deduction has now doubled.

Karachale says, “It’s now $12,000 for individual filers, and $24,000 for joint filers. The math can get complicated, but there are some situations where the medical expenses aren’t that high, so it makes more sense to take the standard deduction instead.”

He also recommends paying close attention to all your sources of income. Social Security benefits, pensions and annuity payments all count as income. “The biggest change for high-income retirees is a new 20% deduction on your business income,” Karachale says. “If you have income from investments, the family business, or some form of profit-sharing revenue, you can take that favorable new tax deduction.” And that deduction will change your AGI, which, in turn, impacts how much you can deduct as medical expenses. Yet another reason to talk with a professional tax preparer.

If you’re considering a senior living community, be sure to factor in these possible tax savings. Ask each community you visit to tell you what percentage of the fees are allocated toward medical expenses. And you might want to consider making the move sooner rather than later – because when the threshold for medical expense deductions changes after 2018, you won’t save as much money.

Did You Know: The Most Tax-Friendly States for Retirees

Based on factors like taxes on retirement income, property and sales taxes, and special tax breaks for seniors, here are the top 10 most tax-friendly states for retirees to live.

  1. Wyoming
  2. Alaska
  3. South Dakota
  4. Mississippi
  5. Florida
  6. Pennsylvania
  7. Nevada
  8. New Hampshire
  9. Kentucky
  10. Georgia

Sources

IRS.gov

Medical Expense Tax Deduction: Key Characteristics by State, AARP Public Policy Institute

State-by-State Guide to Taxes on Retirees, Kiplinger, November 2017