Continuing Care Retirement Communities, Medical Expenses and Your Taxes

Continuing Care Retirement Communities

Continuing care retirement communities (also known as CCRCs or life plan communities) are residential communities that provide life-long living and health care options. Many CCRCs provide a full spectrum of medical care options to accommodate the health care needs of its residents, including home health care, assisted living, rehabilitative services, or advanced skilled nursing care. Residents benefit from living in a single, stable environment while being able to access the medical care that they need at various stages of life. CCRCs also provide other services, such as dining, housekeeping, scheduled transportation, home maintenance, security, and social activities.

The majority of CCRCs charge residents an initial entry fee and subsequent monthly maintenance and service fees. According to AARP, “the average initial payment is $329,000, but it can top $1 million at some communities,” and subsequent monthly maintenance or service fees can run “$2,000 to $4,000.” A portion of the initial entry fee might, or might not, be refundable, depending on the CCRC and the terms of the residence agreement.

Are Fees Paid to CCRCs Medical Expenses?

Given that CCRCs provide ongoing medical care to its residents, one might ask if these payments are tax deductible medical expenses. The simple answer is, yes, fees paid by residents to CCRCs that provide medical services are deductible medical expenses, but only in part. The more complicated question is, how much of the initial entry and monthly fees are considered deductible medical expenses?

What are medical expenses?

The Internal Revenue Code provides individuals with an itemized deduction for medical care expenses for the taxpayer, spouse and dependents, to the extent those expenses exceed 7.5% of adjusted gross income.

Medical care expenses are amounts paid to medical practitioners for the “diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.” This includes amounts paid for prescription drugs or insulin. Medical expenses also include insurance premiums you pay for policies that cover medical care as well as long-term care.

IRS and the Tax Court have determined that a portion of the initial entry fee and monthly fees paid by individuals in connection with CCRCs are allocable to medical care and deductible as a medical expense in the year paid. The deductible amount is often calculated by the facility management who look at the medical expenses of the facility in comparison to total expenses of the facility.

What if a Resident Leaves the CCRC?

Some CCRCs provide a partial refund of the initial entry fee if the resident leaves the CCRC. The portion of the refunded initial entry fee attributable to medical expenses previously deducted by the taxpayer must be included in gross income in the year received.

Ask the Attorney

Client: Will Medicaid take my home?

Attorney: The short answer is no, however, it could be subject to Medicaid Estate Recovery without proper planning. There are many strategies we use to protect assets when we develop plans for long-term care.

Preparing early helps to avoid significant costs. If a nursing home costs $6,000 per month, then each month of delay in planning is an additional $6,000 you will never recover. Even in cases where a person is already in a nursing home, assets can be protected. The earlier planning occurs, the more money can be saved, maintaining the security of a spouse and preserving a legacy for children.

Long-term care also involves careful tax planning. Failure to comply with tax laws, including income tax, gift tax, and, possibly, federal estate taxes usually results in the payment of significant extra taxes.

Pet Corner

Sassy: Did you know that there are two species of African elephants: the African forest elephant (Loxodonta cyclotis) and the African savanna elephant (Loxodonta africana). In March 2021, the International Union for Conservation of Nature (IUCN). The IUCN Red List of Threatened Species now lists the African forest elephant as critically endangered and the African savanna elephant as endangered; both species threatened with global extinction. According to the IUCN’s press release, “this is the first time the two species have been assessed separately for the IUCN Red List, following the emergence of new genetic evidence.”