Are Assisted Living Costs Tax Deductible? Find Out Now!
According to CMS, the average person over 65 spends more than $22,000 a year on healthcare. But are assisted living costs tax deductible? It's a question many families face when planning for senior care.
Today we're taking a closer look at the tax implications of assisted living, including what costs may qualify for deductions and how to make informed financial decisions for senior care.
Assisted Living Tax Implications
Assisted living offers a range of services that help seniors with daily tasks while providing a comfortable living environment. The costs can vary greatly depending on the level of care and amenities provided. Understanding how these expenses align with tax rules can help families better manage their finances.
There are three primary aspects to consider when examining assisted living costs and potential tax deductions:
- The types of services included in assisted living
- The distinction between medical and non-medical expenses
- How IRS guidelines classify deductible medical costs
Services Included in Assisted Living
Assisted living typically covers a combination of housing, meals, and personal care services. These services often include help with bathing, dressing, and medication management. While these expenses are necessary for daily living, not all of them may qualify for tax deductions.
Medical vs. Non-Medical Expenses
The IRS differentiates between medical and non-medical expenses. Medical expenses must be directly related to healthcare, such as nursing care or therapy. Costs for room and board, however, are usually considered non-deductible unless they are part of medical care for a chronically ill individual.
IRS Guidelines for Deductible Costs
For expenses to qualify as deductible, they must exceed 7.5% of your adjusted gross income. Additionally, the care must be deemed medically necessary by a healthcare provider. It underscores the importance of keeping thorough records and obtaining a doctor's certification for care needs.
Are Assisted Living Costs Tax Deductible?
Determining whether assisted living costs are tax deductible depends on specific criteria set by the IRS. Understanding these rules can help families plan for expenses and reduce financial strain. Three main factors influence the deductibility of these costs:
The medical nature of expenses
Qualifications under IRS guidelines
The taxpayer's ability to itemize deductions.
Medical Nature of Expenses
For assisted living costs to be tax deductible, a portion of the expenses must qualify as medical care. It includes services that are essential for treating or managing a medical condition.
Examples include nursing care, physical therapy, and assistance with activities of daily living, such as bathing or dressing, if prescribed by a healthcare professional. Costs that are not directly related to medical care, like room and board, are typically excluded unless the individual is chronically ill.
IRS Guidelines and Definitions for Deducting Senior Care Costs
The IRS considers an individual "chronically ill" if a licensed healthcare provider certifies that they need substantial assistance with at least two daily living activities or require supervision due to cognitive impairment.
The certification must be in writing and updated annually. The expenses must also align with IRS Publication 502, which outlines deductible medical costs.
Itemizing Deductions
Taxpayers must itemize deductions to claim any portion of assisted living expenses. It means listing all qualifying expenses on Schedule A of their tax return.
The total medical expenses must exceed 7.5% of their adjusted gross income to be deductible. This threshold can be challenging for some families to meet, but careful tracking of all eligible costs may help.
Factors That Determine Deductibility
For costs to qualify, the care must be directly tied to medical needs. Services such as nursing care, physical therapy, and assistance with daily activities like eating or mobility may be considered deductible if they are medically necessary. General living expenses, such as housing or meals, are only deductible if they are part of the medical care plan for a chronically ill individual.
The IRS has specific definitions for medical needs. To qualify, an individual must be diagnosed as chronically ill. It requires a certification from a licensed healthcare provider stating the individual needs substantial help with at least two daily living activities or requires supervision due to cognitive impairment.
Proper documentation is essential to qualify for deductions. A written care plan from a healthcare provider is necessary, along with receipts and records of payments. Keeping these documents organized helps ensure that the expenses meet IRS standards for deductibility.
Financial Planning for Seniors and Assisted Living
Financial planning is an important part of managing the costs of assisted living. Many families are unaware of the strategies they can use to make senior care more affordable. By taking a proactive approach, they can explore options that may lead to tax savings or other financial benefits.
These include:
- Long-term Care Insurance
- HSAs and FSAs
- Tax Considerations
Long-term Care Insurance
Long-term care insurance is one option that can help cover assisted living expenses. Policies vary, but some include benefits for medical services provided in an assisted living setting. Reviewing the details of any policy can help families determine what is covered and how it might reduce out-of-pocket costs.
HSAs and FSAs
Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs) can also play a role in financial planning. The accounts allow individuals to set aside pre-tax dollars for qualifying medical expenses. While these funds can't be used for all assisted living costs, they may apply to specific medical services included in the care plan.
Tax Considerations
Tax considerations should also be part of the planning process. Understanding the tax savings on senior living can make a significant difference in overall affordability. Families should keep records of all payments and consult with tax professionals to identify potential savings.
Understanding Senior Care Deductions
Are assisted living costs tax deductible? This question is central for many families managing senior care expenses.
Start your day with coffee and breakfast at Town & Country Family Restaurant, then enjoy a round of golf at Timber Creek Golf Course. Take a scenic walk at Lowell Park or visit the Dixon Family YMCA. Our assisted living community offers engaging activities and support with personal care, housekeeping, and medication management.
Get in touch today to find out how we can help your loved one's health journey!