Most of us are aware that when a taxpayer’s medical expenses exceed a portion (7.5%) of annual income, those expenses can become itemized deductions on tax returns, and taking the decuction, will, therefore, save income taxes. It's tax season and a good time to discuss an important issue for many Low Country senior residents who live in the numerous Assisted Living Facilities (ALF’s herein) in the area. ALF residents should be aware of tax laws specifically applicable to them. ALFs are NOT nursing homes, but they do cater to our elder community and some, if not ALL of the services provided, can fall under the rubric of “medical expenses” as the tax code defines that term so that the entire ALF monthly bill may qualify as a medical expense. And, if not all ALF monthly expenses qualify as deductible medical expense, a portion of the monthly cost probably will.
The tax code (IRC § 7702B) makes pretty clear that most, if not all, costs of nursing home care are deductible items. But the status of ALF cost deductibility has not always been as clear. The tax code provides rules for deducting certain qualified costs as medical expenses.
Deducting All ALF Costs
ALF residents’ deductible costs are those that are necessary rehabilitative services, maintenance or personal care services that are:
(1) required by a chronically ill individual, and
(2) provided pursuant to a plan of care by a licensed health care practitioner.
Although the term “chronically ill” conjures images of the bed-ridden, near death and comatose, this is simply not the level of illness that defines the term. And one might initially ask, therefore, what is a “chronically ill” person doing in an ALF anyway? One has to look at the IRC definition of “chronically ill” to understand.
According to the tax code an ALF resident can meet this definition if within the previous 12 months, a licensed healthcare practitioner certifies that the resident
1. is unable to perform at least two activities of daily living (ADLs) without substantial assistance from another individual for at least 90 days due to a loss of functional capacity. (ADLs include eating, toileting, bathing, dressing, transferring and continence), or,
2. requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment.
As you can see by this definition of “chronically ill” one does not have to be bed-ridden or wheelchair bound to qualify.
A certification of the chronic illness requirement must be attached top your tax return. The certifying licensed care practitioner can be any physician, registered professional nurse, or licensed social worker, and this practitioner does not have to be an employee of the ALF. The licensed care practitioner must personally examine the resident and provide a written opinion.
A FORM OF THIS CERTIFICATION CAN BE FOUND AT THE FORMS PAGE OF THIS SITE or Click
here. (thanks to Donald Vanerilli, Esq. see New Jersey Elder Law attorney blog link on home page)
The term “plan of care” is not defined within the Tax Code. Nursing homes are required to prepare a written plan of care for each resident. Although written care plans for ALFs are not required, most ALFs prepare them. The plan of care must be prepared by a licensed care practitioner and also attached to the return.
If these requirements are satisfied, then 100% of the costs of the ALF (including room and board) may be deductible.
Deducting Some ALF Costs
Even if the resident does not qualify under the above definitions and monthly ALF costs are not 100% deductible, it is still possible to qualify a portion of monthly ALF costs as a medical expense deduction. An ALF resident can claim an itemized deduction for unreimbursed medical expenses to the extent that such expenses exceed 7.5% of adjusted gross income. The room and board and personal services costs would not be deductible.
An ALF should be able to provide an estimate of the deductible portion of its costs, and the taxpayer can attach the statement to the tax return. Typically 30% to 40% of the ALF costs are for nursing services.
Using Tax Deferred Plans to Pay Medical Expenses
Many ALF residents look to quailified retirement plans (e.g. IRA's, 401k's) to pay for monthly expenses. A withdrawal from such a plan IS taxable income. If the medical expense deduction is high enough it is possible to balance withdrawals and expenses that result in zero tax liability on the otherwise taxable withdrawal.
I very often see clients paying for nursing home expenses (that are 100% medical expense, and usually well above the 7.5% threshold) using traditional savings accounts to pay long-term care expenses while their IRA's sit unused, unless perhaps for annual mandatory withdrawals. This seems to me to be a waste of substantial tax savings. If the nursing home resident passes away, the balance in the IRA or 401k will have to pay those deferred taxes and it is unlikely that any deductions will be available.
(Due credit for much information in this article goes to: NAELA News, Robert C. Anderson, LL.M. Taxation, CELA,, “How to Deduct Assisted Living Facility Costs” (2008).
