“My elderly relative has determined that she can no longer take care of herself”: are the costs of her assisted living facility tax deductible?

By Andrew Keshner

“She was basically asked to go there after post-operative rehabilitation”

Dear tax specialist,

I have an elderly relative in an assisted living facility in Indiana. She was basically asked to go there from post-op rehab because they determined she couldn’t take care of herself anymore.

Monthly living expenses include room/board, the cost of diabetic care and the fee for a moderate nursing aide package (which can go up or down depending on the amount of help they deem necessary for her).

Are any of these monthly fees tax deductible as medical expenses?

In search of family

Dear looking out,

I wish your loved one a full and speedy recovery. I bet it’s been hard on her and her whole family, including you. The good news is that the tax code can help.

Some, if not all, of the costs you describe are deductible medical expenses, according to the tax experts I interviewed. Making the medical expense deduction work for your loved one may take some extra effort, but it could definitely pay off.

Claiming medical expenses can be “a pain in the tail because it requires keeping records,” said Letha Sgritta McDowell, outgoing president of the National Academy of Elder Law Attorneys.

But at a time when medical care is so expensive and inflation is eating away at budgets, the money spent and the amount of potential deduction is likely worth it, she said.

Tom Bayer, partner in charge of the Indianapolis office for Sikich, a tax, accounting and consulting firm, made the same point. “Part of [the expenses]and potentially all of that, could be deductible,” he said. Sure, there are extra efforts to amass records, but “unless they’re just really rich, you’re going to amass a lot.

The starting point

The IRS code contains the standard deduction and the itemized deduction. Taxpayers can only deduct medical expenses when they itemize their deductions. In addition to medical expenses, other itemized deductions include mortgage interest, state and local taxes, and charitable contributions.

The majority of Americans opt for the standard deduction. Through mid-July, 126.6 million returns claimed the standard deduction while 11.7 million returns were itemized, according to IRS data.

Why the imbalance?

This makes more sense because the size of the write-off that comes from the standard deduction is greater than the size of the write-off that could come from adding all the itemized deductions.

When Americans file their federal income taxes early next year, the standard deduction will be $12,950 for individuals and $25,900 for married couples filing jointly. For people age 65 or older, the standard deduction is $14,700 for individuals and $27,300 for married couples filing jointly. There is also an additional deduction amount if the taxpayer is legally blind.

I don’t know your parent’s age and marital status, but for the money to make sense, the sum of his itemized deductions should exceed the applicable standard deduction amount.

This might be easy to do if we discuss medical care and assisted living. Last year, the median monthly cost of an assisted living facility was $4,500, according to Genworth Financial

If these estimates are any guide, even a brief stay for your relative can rack up enough costs to turn an itemized deduction into the best decision.

tax details

Taxpayers can deduct the amount of medical and dental expenses that exceed 7.5% of adjusted gross income (AGI). For reference, the AGI is number line 11 of the 1040 in the 2021 tax year. The medical expense deduction is claimed on Schedule A.

Say your relative earns $70,000 a year (which is roughly the median income for that year in America): applying 7.5% to $70,000 gives $5,250, so that initial $5,250 in medical expenses cannot be deducted. But eligible medical expenses in addition to this initial sum can be deducted. Again, there is a good chance that the cost of your loved one’s care will exceed this amount.

So what is deductible?

“Medical care expenditures include payments for the diagnosis, cure, mitigation, treatment, or prevention of disease, or payments for treatments affecting any structure or function of the body,” the IRS says.

This may include hospital care and “nursing home care, if the availability of medical care is the main reason for being in the nursing home, including the cost of meals and accommodation charged by the hospital or the nursing home,” the tax agency said. .

(Surely families and health care providers know there are differences between assisted living facilities and nursing homes, but the IRS explainers on “assisted living” refer to tax rules applicable to retirement homes.)

Long-term care can benefit from the deduction as long as it is “required by a person with a chronic illness” and also “provided in accordance with a plan of care prescribed by a licensed medical professional”, says the IRS.

Someone is “chronically ill” – according to the IRS – if a licensed medical professional declares that the person cannot carry out at least two parts of daily life without assistance for at least 90 days. This includes eating, dressing, bathing and going to the bathroom.

I don’t know the extent of the care your loved one needs, but she wouldn’t be in an assisted living facility if she didn’t need at least some help.

Other eligible expenses include insurance premiums, and this includes Medicare premiums and Medicare supplemental insurance. Don’t forget co-pay for prescriptions, medical transportation costs to get to appointments and more, McDowell said.

For anyone adding up the costs to determine whether to itemize, “once you get close because you have even a few months of these expenses, it becomes a much larger number than most people realize. had planned,” she noted.

Additional insurance

There are additional steps your parent should consider, McDowell said. For clients in similar situations, McDowell advises having their primary care physician sign a letter stating that the person was “chronically ill” or had a “chronic illness” and that the stay in a nursing home or residence- services was “in accordance with a plan of care.”

You don’t have to submit this letter to the IRS, but keep it on file in case of an audit years later, McDowell said. The same goes for receipts and bills documenting the cost of care, she added.

Another place to get something in writing for tax records is the assisted living facility itself, Bayer said. For these facilities, “this is not a new issue,” he said.

There are plenty of potentially deductible expenses, but if you can’t search records for every last bit of cost, don’t worry, McDowell said. Get as many as you can – plus the bigger costs, like assisted living bills, should be easy to get.

I don’t know how your loved one pays for all incidental fees and expenses.

But if she’s tapping into an IRA to cover the costs — a common move McDowell sees — there may be additional pitfalls making the deduction even more necessary.

Without getting into the thicket of rules and exceptions regarding early IRA withdrawals and required minimum distributions, using the IRA will likely be a taxable event resulting in a higher tax bill. The medical expense deduction is there to counter the rising income tax bill, McDowell said.

“It’s such an important balance. If you don’t do it, people can be a world of trouble from a tax standpoint.”

Hope this helps, and again, a full and speedy recovery to your loved one.

A tax question? Email me at: [email protected]

Thanks for reading. I want to help you think more broadly about the issues affecting your taxes. I don’t offer tax advice, just an attempt to consider what the whirlwind of tax rules and economic conditions might mean for your wallet.

I’m here for the reader who faces his taxes with an air of resignation. You don’t like taxes too much, I understand. I was once that guy. Beneath the jargon, think of your taxes as a maze – with money at the end. Or a trap you need to avoid.

-Andrew Keshner

 

(END) Dow Jones Newswire

11/24/22 0933ET

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