There is nothing assured in life other than death and taxes is a common saying, but anytime taxes are involved, things tend to get complicated pretty quickly. Many seniors use various forms of payment for healthcare and living expenses, including assisted living. Many expenses are tax-deductible and, in many cases, some or all of your assisted living costs may also get you a tax break.
We have put together some guidelines that will help seniors or their family members in regard to tax deductions and assisted living costs. Our guide is not a substitute for actual tax advice and is only meant as insight into what part of assisted living expenses, if any, may be tax-deductible. It is important that you consult with a licensed tax professional in your state for accurate filing information.
Internal Revenue Code Section 213 allows for tax deductions for any medical costs that surpass 7.5% of a person’s adjusted gross yearly income. This percentage applies to seniors as well as those still working on a regular basis. Percentages may change every year so make sure to check the exact figure with a certified tax professional.
Calculation Example
An example would be a senior who has a gross income of $50k with an adjusted income of $45k annually. Medical costs such as assisted living that is not provided for by insurance or any other source may be deductible. If the cost goes over 7.5%, which would be $3,375 a year for this example, then amounts over this number would be deductible. So, if the total medical cost for the year were $15,000, then $11,625 of those costs would be eligible for a tax deduction.
Medical cost is pretty straight forward when it comes to hospital visits, medication purchases, and seeing a specialist. Determining if the cost of care provided at an assisted living facility is included as a tax deduction is not always as straightforward. For seniors who live in a nursing home, it can clearly be listed as a medical expense since the caregivers are nurses who offer skilled care for medical conditions. Assisted living may have skilled nurses on site, but not every resident needs nursing care. This difference can make it hard to know if your assisted living expenses will qualify. In section 213 of the tax code that covers medical care, it is listed that “qualified long-term care services” are deductible.
In section 7702B of the tax, qualified long-term care services encompass some specific things. These include preventative, diagnostic, maintenance, and therapeutic care. It also covers other care and is intended for individuals or seniors who are chronically ill. The individual must also have a treatment or care plan that is laid out in detail by a health care professional, or medical doctor that is licensed.
Feeling under the weather and actually being chronically sick are two different things. For tax purposes, your doctor or nurse will have to have prepared a written plan of care for you to follow to qualify. There are also other things that must be observed by a medical professional in order to qualify as being chronically ill.
An individual senior who is not able to perform at least two daily living activities per day for at least 3 months can be termed as chronically ill. Daily living activities, also called ADL’s are actions such as using the restroom alone, feeding yourself, getting dressed without assistance, bathing alone, maintaining continence, or getting in and out of bed alone.
A senior or individual who needs a considerable about of monitoring or supervision in order to protect their health may be termed as chronically ill. This can be due to mental or cognitive impairment such as dementia or Alzheimer’s disease. It can also be due to chronic memory loss due to other conditions that affect the mind.
If you or your loved one has moved into an assisted living home or community due to the need for minor assistance or loneliness, then it may be harder to qualify for a tax break. However, if you or your loved one are ensconced in a memory care unit or need help eating or bathing, the costs of care may qualify for a medical tax deduction.
There were sweeping reforms to the tax code that came into effect in 2018 that have changed the way deductions are calculated. Many caregivers and seniors have been completing their taxes for years, even generations following the previous tax rules, which can make the new changes difficult to understand. If you are at a loss about the Tax Cuts and Jobs Act of 2018, we are here to help. We will detail the changes to medical deductions for seniors and tax deductions for caregivers to help you make sense of the current tax code.
The 2018 tax season and beyond brought with it many changes for both seniors and the caregivers of those seniors. This will apply to those filing for their returns for 2018 and later depending on when you file. Some of the changes include the elimination of the personal exemption, higher standard deductions, a new $500 dependent credit and new modified itemized deduction rules.
It was estimated by the IRS that over 400 forms will need to be generated from scratch or modified from their current form in order for taxpayers to be able to file correctly during the 2019 season. This also includes publications detailing the changes and instructions on how to properly file with the new changes put into effect. Some important changes to note we will explain in further detail below.
The base amount of standard deductions has doubled for the 2018 tax season and beyond. The new numbers are:
Seniors and caregivers are able to file for the standard amount of deductions or itemize their deductions on Form Schedule A, however, only one option can be used. Seniors over the age of 65 may be able to qualify for a higher amount of their standard deduction if they don’t itemize. The extra amount can range from $1,300 to $1,600. To view what your standard deduction will be for your age and bracket, check IRS Publication 554 - Standard Deduction Worksheet, page 22.
Currently, there is no limit on overall itemized deductions, which means that some seniors or caregivers will be able to file for more deductions. Previously, these may have been limited or unusable due to the base income.
Any senior or caregiver who owns a home with a mortgage will also face changes. If the loan was originated December 15, 2017, or earlier, the maximum interest or debt that can be deducted is one million for married couples or half that for those filing separately. Mortgage loans that originated December 16, 2017, and beyond will be able to deduct $750,000 in interest when filing as a married couple or half of that when filing separately. On the topic of home, the interest from home equity loans and home equity lines of credit are no longer deductible with exceptions. If the interest paid on the proceeds of the loan are used to improve the main home or a second home, or if they are used to build or buy property, they will be eligible for deduction.
Another change is that married couples are unable to deduct more than $10,000, or half the amount for single filings of local and state taxes. This includes real estate taxes, income tax, and personal property taxes.
In the outgoing tax code, seniors and caregivers alike were able to claim personal exemptions for themselves, dependents, and spouses. Under the updated tax rules, those filing are no longer able to claim personal exemptions for themselves, dependents, and spouses. There are other ways to save on taxes if you or your loved qualify for other credits.
Elderly & Disabled Credit – This credit amount will vary depending on the income and the filing status of the person filing for seniors over the age of 65 at the end of 2018 and thereafter. There is more detailed information regarding this credit in IRS Publication 554, pages 26-29. This may help to cover some of the costs incurred by enrollment in an assisted living facility.
Dependent Care Credit – Seniors or loved ones who pay someone to take care of their adult dependant or spouse can claim a $500 credit. This claim can be applied to assisted living costs.
Before the current changes to the tax code, adult children were able to claim their elderly parents as dependants if they paid at least half or more of the cost of their care. The total amount came to $4,050 for a personal exemption for each senior. As of the current rules, which changed as of 2018, these personal exemptions are no longer allowed. However, any relative that qualifies can still be claimed as a dependant. To qualify, the senior relative must live with you year-round or they must be a qualifying relative who doesn’t reside in your home. Your grandparents, parents, and other direct ancestors do qualify, as do your senior in-laws, even if they do not reside with you. That means that if you have placed your relatives in an assisted living community and you pay for their care, they qualify as a dependent for tax deductions.
Assisted living is often paired with skilled nursing care, but not always. In order for most seniors to qualify for a deduction of their assisted living expenses, there must be some form of medical assistance provided. Medical costs, in general, are tax-deductible for seniors and others regardless of age.
Seniors who choose to itemize their deductions instead of opting for a standard deduction must follow some simple calculations. Any medical and dental cost paid for yourself or paid on your behalf that surpasses 7.5% of your annual adjusted income can be deducted. This is a reduction of 10% from previous years, which went into effect as of the 2018 tax season. Items that qualify as deductible medical expenses are:
The full list of medical expenses that qualify for a tax deduction can be found on page 23 of the IRS Tax Guide for Seniors and in IRS Publication 502.
Any long-term care services such as assisted living, nursing home care, and in-home skilled nursing services can be deducted as medical costs under certain circumstances. If the services or enrollment into a long-term facility such as an assisted living home are for a person who is chronically ill, they can be deducted. If care or enrollment is requested by a licensed medical professional, they are also eligible for deduction. We listed above the requirements for a person to qualify as being chronically ill, this applies to all iterations of the term.
Many seniors will purchase long term care insurance to help cover their medical costs as they age. Most often, the premiums paid for this insurance can be deducted as a medical expense on a tax filing. Long-term care insurance will often cover part or all of assisted living costs depending on the level of care a senior requires. There are limits to the number of tax deductions you can claim for long-term care insurance each tax year. The current amounts are:
It is also important the policy you hold actually be qualified for deductions. Most policies are tax-qualified, but there is a small number of long-term care policies that are exempt from tax deductions. The first page of the policy should list this information, however, if you are unable to find this information, the issuer can inform you verbally.
Understanding the changes to the tax code and how it can apply to assisted living deductions can be confusing, but with our guide and help from a licensed tax agent, they don’t have to be. Make sure to go over your medical expenses and qualifications in detail prior to filing to ensure that you receive the maximum deductions possible for your assisted living expenses.
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