DEDUCTING LONG-TERM CARE EXPENSES

Article By: Jeff Skolnick, CPA, M.S. Taxation

According to a survey on the Genworth website, the cost of assisted living facilities are nearing $50,000 per year and nursing homes are edging closer to $100,000 per year. This is a lot of money and nobody pays these exorbitant rates unless they have to.

I want to make sure if for some reason you find yourself or a loved one in such a predicament you want to look into the possibility of deducting the costs of the long-term care facility.

Most of us are familiar with the fact that in order to utilize medical expenses as an itemized deduction for Federal tax purposes, medical expenses must exceed 10% of our Adjusted Gross Income (AGI).

One of the items allowed as a medical expense under the tax law is “qualified long-term care services”. Here’s where you have to pay attention to a number of details. This by the way is also why I recommend if you suspect you may be in this situation that you contact a tax professional. This deduction can be worth thousands and thousands of dollars, so you want to make sure you get this right.

The internal revenue code states:

 “qualified long-term care services” means necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal care services, which—

(A)

are required by a chronically ill individual, and

(B)

are provided pursuant to a plan of care prescribed by a licensed health care practitioner.

Now that we know the definition of qualified long-term care services, we must now determine the definition of a chronically ill individual.

A chronically ill individual is anyone who has been certified by a licensed health care practitioner as being unable to perform at least 2 activities of daily living without substantial assistance from another individual for at least 90 days due to a loss of functional capacity. An individual may also be classified as chronically ill if one of the aforementioned licensed health care professionals certifies the individual requires substantial supervision to protect the individual from health and safety threats due to severe cognitive impairment.

A licensed health care practitioner is defined as a physician, registered professional nurse or licensed social worker.

The activities of daily living are also defined in the tax code. They are as follows:

• Eating
• Toileting
• Transferring
• Bathing
• Dressing
• Continence

All of the above is a long-winded way of defining how an individual qualifies his/her long-term care facility costs as qualified medical expenses. Now that you have a rough understanding of the background I will give you the simplified version. If a licensed health care practitioner prescribed the plan, then you will be able to deduct the expenses.

I have encountered situations where I had wealthy clients pay substantial amounts of money to live in facilities where they can transfer from unassisted living to assisted living to nursing home all within the same facility. A large portion of the money paid is to offset future medical expenses. These facilities will sometimes give you break downs of medical costs on an annual basis.

You must of course be very careful. I started out by stating the costs we are looking to deduct can be anywhere from $50,000 to $100,000. As you can imagine the IRS is going to want you to have substantiation if you are audited. This is, however, a deduction well worth taking if you qualify. I have deducted in excess of $100,000 of medical expenses on a taxpayer’s return and it dropped the individual’s income tax to $0. Once again, I stress that if you feel you may be able to take advantage of this medical deduction, consult with a tax professional and make sure you do it correctly. 

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