Are you seeking to understand the various tax rules relative to tax-deductible expense for long-term care costs? Look no further!
The following information is not to be considered legal or tax advice. Tax laws change frequently, and you should consult with a CPA before making important decisions about your tax liability or income tax returns.
The Problem
Unfortunately, elder care is expensive. Therefore, folks face the impossible decision: “Do I compromise my own level of care to save money? Or do I bankrupt myself in order to obtain a higher level care?”
The Solution
In most cases, qualified long-term care expenses are tax-deductible.
The qualified long-term care services you receive are deductible from your gross income as an itemized deduction to the extent that your total of unreimbursed medical expenses exceeds 7.5% of your adjusted gross income.
Okay, so what does that mean?
For instance: if you pay for your long-term care out of pocket AND you are not reimbursed by insurance, AND that cost is more than 7.5% of your adjusted gross income you can deduct the expense.
Breaking It Down
How are Long Term Care Services Defined?
Long Term Care services are defined as necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services; as well as maintenance or personal care services required by a chronically ill individual. These services must be provided pursuant to a plan of care prescribed by a licensed health care practitioner.
Who is Considered Chronically Ill?
A chronically ill individual is someone who has been certified within the previous twelve months by a licensed health care practitioner and who:
- Is unable to perform (without substantial assistance) at least two activities of daily living (ADL – eating, toileting, transferring, bathing, dressing, and continence) for at least ninety days due to a loss of functional capacity.
- Has a similar level of disability as determined under regulations prescribed by the Secretary of the Treasury in consultation with the Secretary of Health and Human Services.
- Requires substantial supervision to protect the individual from threats to health and safety due to severe cognitive impairment.Let’s expand our understanding on some of these terms and phrases used above.
Who is Considered a Licensed Healthcare Practitioner?
A licensed health care practitioner is a physician, registered nurse, licensed social worker, or another individual who meets the requirements prescribed by the Secretary of the Treasury.
HIPPA (Health Insurance Portability and Accountability Act) clarified which expenditures for home care qualified for the medical expense deduction.
Now, qualified long-term care services include maintenance or personal care services. This is the type of care provided in Adult Family Homes. In Washington State Adult Family Homes are required to have a written care plan — a necessary provision for tax deductibility.
What are Maintenance and Personal Care Services?
Maintenance and personal care services primarily provide chronically ill individual assistance with their disabilities (including protection from threats to health and safety due to severe cognitive impairment).
These services include meal preparation, household cleaning, and similar services that a chronically ill person is unable to perform. The services do not have to be performed in a nursing home, or by a licensed medical professional. As long as the services are provided under a plan of care prescribed by a licensed healthcare practitioner the cost of a care attendant qualifies.
How does the Process Differ for Individuals With Cognitive Impairment?
For individuals who are physically able, but cognitively impaired, parameters differ. These individuals are treated similarly to those who are unable to perform at least two activities of daily living (without substantial assistance).
How do we Evaluate the Severity of Cognitive Impairment?
The 30-point questionnaire called MMSE (Mini-Mental State Examination) is commonly used to test for cognitive impairment.
An impairment is considered serious when a loss of cognition places an individual in jeopardy of harming themselves or others and therefore requires substantial supervision.
Previously, Nursing Homes payments qualified as medical expenses as long as medical care was the primary reason for the stay. If medical care was not the primary concern only the cost of the specific medical care qualified — not meals and lodging.
The enactment of a new IRS code included qualified long-term care within the definition of “medical care.” Meaning amounts paid to long-term care facilities qualified as medical expenses; providing the sick individual met either the activities of daily living (ADL) or cognitive impairment requirements and the costs were pursuant to a plan of care prescribed by a health care practitioner.
What if You are NOT Chronically Ill?
For residents who are not chronically ill, fees paid to retirement communities and Assisted Living facilities are deductible medical expenses, given the costs are attributable to medical care. The deduction applies to entrance or initiation fees if a portion of the fee is attributable to medical services. The facility is responsible for determining the portion of fees allocated to medical care and should provide this information to the residents annually.
What if You Provide Financial Assistance to Your Spouse or Parent?
If YOU provide financial assistance to an elderly parent, these expenses can also be tax-deductible.
The following is an excerpt from the IRS website:
To claim an individual as a dependent, there are two important qualifications:
- First, the tax filer (usually a family member) must provide at least half of the dependent’s financial support for the year, and
- Second, the dependent must be related or have lived with the tax filer for one full year.
However, an important exception exists regarding the financial support qualification. If several family members together contribute 50% of the dependent’s support the family can choose a single member to claim the sick or elderly relative as a dependent. This is referred to as creating a “multiple support declaration.”
Please be mindful, these interpretations are based on conversations with an accountant, and reading the law and Congressional Conference Committee reports. I strongly recommend that you check with your own tax advisor.
Further Information
If you are interested in additional information about long-term care and tax deductions visit the IRS site at Credit for the Elderly or the Disabled (IRS Publication 524).
