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Are You Overlooking the Assisted Living Tax Deduction?

Sarah Stevenson
By Sarah StevensonMarch 23, 2015

Navigating the details of tax preparation gets even more complex when you have medical and assisted living costs to consider. We break down the latest rules for what you can and can’t deduct.

The Assisted Living Tax Deduction

With over 700,000 seniors residing in over 22,000 assisted living facilities nationwide, according to the CDC’s National Study of Long-Term Care Providers, assisted living is big business. Not only that, 86.2% of residents are paying out of their own personal financial resources. For a one-bedroom apartment the median cost is $3,500 per month. That translates to a lot of money consumers are paying out of pocket for assisted living.

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Daunting as that sounds, there are ways that seniors and caregivers can get a tax deduction for assisted living facility costs if they can be characterized as medical or dental expenses. Diligent record keeping throughout the year, even for related expenses like mileage from doctor visits, can add up to a lot of write-offs come tax time. Want to ease the financial burden? Read on for some tips on assisted living write-offs, and find out what you can and can’t deduct.

Qualifying for Assisted Living Write-Offs

As long as you’ve been keeping those records throughout the year for assisted living costs and medical expenses, then when tax time rolls around, you’ll be well prepared to qualify for write-offs. First and foremost, the taxpayer must be entitled to itemize deductions. However, other requirements differ depending on who the taxpayer is: the senior or the caregiver.

  1. For seniors, or if you’re preparing taxes on a senior’s behalf, you can deduct qualified medical expenses the taxpayer paid for during the tax year (see the next section of this article to find out what qualifies for a deduction). A doctor’s certification for a medical condition can help you provide verification of medical expenses if needed.
  2. For caregivers, you’ll need to first make sure your loved one qualifies as a dependent. They should also be a U.S. citizen or national, or a resident of the U.S., Canada, or Mexico. Next, determine whether you paid at least half of the support for that person and the senior does not have income exceeding $3,950.
  • If you provided more than half of your loved one’s support, then you can deduct those qualified expenses on your tax return.
  • If you are part of a formalized multiple support agreement with other family caregivers, you can still deduct medical expenses if, collectively, the caregivers provide more than half of your loved one’s support — even if you, individually, did not contribute more than half.
  • You will also be allowed to take a dependency exemption for that individual.

Caregivers take note: According to the IRS, Publication 502,

“For you to include these expenses, the person must have been your dependent either at the time the medical services were provided or at the time you paid the expenses.”

There may also be different requirements for married couples filing separate returns, so make sure to check with a financial advisor if you’re not sure whether you qualify for assisted living write-offs.

How Much Can You Deduct for Assisted Living?

There are limits to how much you can deduct for qualified medical expenses. “Although the deduction floor for medical expenses has increased to 10% of adjusted gross income (AGI), beginning in 2013, it remains at 7.5% of AGI through 2016 for taxpayers who were age 65 or older as of Dec. 31, 2013,” reports Business Management Daily.

That means, if either you or your spouse was born before January 2, 1950, the threshold is lower, and you can start claiming tax deductions for any medical expenses in excess of 7.5% of AGI. For example, if you are over 65, your AGI is $40,000, 7.5% of which is $3,000, and you have $4,000 worth of qualifying medical expenses, you can deduct $1,000 worth of expenses.

What You Can Write Off — and What You Can’t

So what qualifies as a medical expense, and can you take a tax deduction for assisted living? Generally, anything that is directly related to the individual’s medical care, including health or Medicare insurance, long-term care insurance, eyewear, hospitals, hearing aids, and so forth, qualifies as a medical expense. You can find a complete list in IRS Publication 502. But what about the actual monthly cost of assisted living?

According to Craig Kellner, CPA and Partner at EFP Rotenberg LLP, Board Member of Empire State Association of Assisted Living and a specialist in assisted living situations, a facility like a nursing home is easy to take a deduction on, but it’s not so simple when it comes to assisted living:

“Nursing homes are primarily used for medical care, and medical care is always deductible. Assisted living is not necessarily there for medical reasons. It’s often a safety or companionship issue, so an assisted living facility is not usually deductible.”

However, if your loved one is receiving substantial medical care, is in a special needs unit, or is in dementia care at an assisted living facility, then they may qualify for a tax deduction. “You need to have a certified plan of care from a licensed health care practitioner, and be unable to perform at least two activities of daily living,” such as bathing, dressing, or eating, says Craig Kellner. “Then those costs would be deemed to be medical.” Or, if they have dementia and require substantial supervision to protect their health and safety, then AL costs may be deductible.

For other types of housing, such as senior independent living communities, generally the only deductible expenses would be directly related to medical costs — if you pay out of pocket for nurse visits, for example.

Tax Deduction Tips for Seniors and Caregivers

There are a few other things to keep in mind when you’re putting your taxes together this year, whether you’re preparing them yourself, or having a tax preparer or loved one do it for you — or if you’re the one doing taxes for a senior family member.

  1. Tracking down paperwork: Craig Kellner has a good tip for anyone preparing their loved one’s taxes and trying to get the most out of medical deductions. He notes that older clients sometimes forget things, or have trouble finding the paperwork they need. “Look at prior years’ returns for the type of expenses they had in the past,” he says, so you can be as complete as possible about their qualifying deductions. It’s also possible to get a transcript of income received by the individual from the IRS, which can help immensely when you’re filling out that 1040.
  2. Deducting insurance premiums: Not every insurance policy is tax-qualified, especially when it comes to long-term care insurance. Check with the policyholder to make sure the policy qualifies — if it does, then you can deduct the premiums as a medical expense, says the Assisted Living Federation of America.
  3. Don’t forget the fees: If the assisted living facility charges any entrance or initiation fees directly related to medical care, then those are deductible. According to ElderLawAnswers, “The assisted living facility is responsible for providing residents with information as to what portion of fees is attributable to medical costs.”

If you are looking for additional tax tips, don’t forget to read our article on Senior Tax Credit.

Do you have tax tips for seniors or caregivers looking for additional deductions and credits? Share them with us in the comments below.

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