Make the best senior care decision

Qualified personal care services that provide assistance with activities of daily living may be eligible for tax deductions, according to the Health Insurance Portability and Accountability Act of 1996 (HIPAA). If you file an itemized tax return, these expenses may mean you and your family can lower your tax bill and keep more cash on hand.

Memory care falls into the category of long-term care services. While not all services are deductible, your loved one’s care may qualify for a tax deduction for memory care facility costs if they meet the following criteria:

• They are chronically ill, which is defined as being unable to perform at least two activities of daily living and being in need of constant supervision because of physical or mental impairment.
• They’ve had a specialized senior care plan prepared by an assisted living facility’s on-site licensed nurse, in coordination with a physician, outlining the daily services the resident receives.

Caregivers may be eligible for a tax deduction if they have a loved one residing in a senior living community whom they claim as a dependent and who meets residency requirements of the U.S., Canada, or Mexico. A caregiver may also be eligible if they provide more than half of the financial support for their loved one’s in-home care and housing.

A portion of many memory care and assisted living communities’ fees are made up of items that qualify as medical expenses. In some instances, all of these costs associated with memory care can be completely tax deductible.

Additionally, the cost of meals and lodging could be written off as tax deductible, as long as an individual’s reason for being in a senior living community is specifically for medical care and not for personal or preferential reasons. This is most common in nursing homes but may apply to memory care, depending on individual needs and the facility.

Some commonly covered medical expenses can include the following:

• Prescription drugs
• Health insurance premiums
• Transportation essential to medical care
• Dental care (dentures, fillings, etc.)
• Assisted living entrance fees, if directly related to medical care (such as initial assessment and care plan development)
• Nursing services
• Meals and lodging, if the principal reason for being at the facility is for medical care

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Caregivers may be able to deduct qualified, unreimbursed medical expenses that exceed 7.5% of their adjusted gross income (AGI), whether the costs were paid for themselves, their spouse, or a parent/dependent. Itemizing your medical deductions can lower the amount of taxes you owe and give you a larger return than a standard deduction, if those out-of-pocket costs exceed 7.5% of your AGI.

This can help with medical bills and costs you cover out of pocket within the year. You should itemize all medical expenses, and be sure to keep all receipts and documentation to demonstrate that you meet the eligibility requirement.

An extensive list of deductible medical expenses is included in IRS Publication 502. Some of the qualifying expenses include the following:

• Diagnostic devices (such as a blood sugar test kits for diabetes)
• Assisted living, nursing homes, or other residential senior living costs, when deemed medically necessary
• Hospital services
• Home modifications (wheelchair ramps, safety bars, etc.)

To calculate your total medical expense tax deduction, determine the total amount of qualifying senior living or memory care expenses and the total amount of medical expenses paid for that tax year. The deduction will be this amount, minus 7.5% of your AGI.

Long-term care insurance (LTCI) is a specialty insurance policy that helps cover care expenses such as hospital care, senior living services, and in-home care. LTCI policies are purchased through private insurance companies, and they generally must be acquired by a certain age or before a senior experiences any severe health concerns. Premiums for qualified long-term care insurance may be deductible if they exceed 7.5% of the insured’s AGI.

Although the terms vary by state, qualified long-term care insurance must meet the following requirements, as written in IRS Publication 502:

• The policy is guaranteed renewable for a specific amount of time regardless of health changes.
• Upon cancellation of the policy, cash surrender value is not provided.
• Refunds must be used to reduce future premiums — they aren’t distributed as cash.
• The policy doesn’t reimburse for services or items that would be covered under Medicare.

There are limits on how much can be deducted from the premiums, which depends on the age of the taxpayer. The yearly limits on the 2022 version of IRS Publication 502 are set as follows:

• $450 for people age 40 or under
• $850 for people age 41 to 50
• $1,690 for people age 51 to 60
• $4,520 for people age 61 to 70
• $5,640 for people age 71+

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The Child and Dependent Care Credit is a tax credit that can help offset the costs of hiring someone to care for children or other qualifying dependents in order for you to work or look for work. An individual can be considered a qualifying dependent if they aren’t mentally or physically able to care for themselves and are under your care.

To be eligible, a caregiver must do the following:

• Have lived with the qualifying person for more than six months
• Have earned taxable income (money received in compensation for employment, not including unemployment benefits or pensions)
• File as single, head of household, married, or a qualifying widow(er)
• List the qualifying person as a dependent

The credit is a percentage of the costs you paid to a care provider. Up to 50% of those dependent care expenses could be eligible for a tax deduction, depending on your income. Most states have their own versions of the Child and Dependent Care Credit that are linked to the federal credits.

For the 2021 tax year, the federal credit was expanded under the American Rescue Plan Act of 2021, which meant more taxpayers and caregivers were eligible for the first time. These changes have since expired. However, there are enhancements and new alterations for the 2022 tax season you’ll want to be aware of. These include the following:

• Available credit is nonrefundable and can be claimed on qualifying employment-related expenses of up to $3,000 for one person, or up to $6,000 for two or more people.
• The maximum credit is 35% of your employment-related expenses, unless your AGI is over $43,000, in which case it’s 20%.
• The maximum amount that can be excluded from your income through a dependent care assistance program is $5,000 for a single person, or $2,500 if you’re married filing separately.
• Any unused amounts from the Taxpayer Certainty and Disaster Tax Relief Act of 2022, which provided temporary COVID-19 relief for dependent care flexible spending accounts (FSAs) in 2020 and 2021, are to be added to the maximum amount of dependent care benefits allowed for 2022.
• Personal exemption has been suspended, meaning you cannot claim a personal exemption for yourself, a spouse, or your dependents.

A flexible spending account (FSA) also provides a caregiver with some tax advantages when they’re paying for dependent care expenses. A FSA is a type of savings account that’s funded by a portion of your paycheck — up to a contribution limit set by the IRS — to reimburse payments for medical care.

Dependent care FSAs can be used to reimburse dependent care expenses with pretax dollars. As a result, this reduces your taxable income and decreases the amount of payroll taxes you have to pay.

The IRS has resources available online, including free tax forms and publications detailing a variety of credits and deductions. If you think you may qualify for any of these credits and deductions, consult with a senior living tax professional to ensure compliance with IRS rules.

Additionally, A Place for Mom’s trained Senior Living Advisors are available to provide guidance on financing memory care and long-term care, all at no cost to you.