It’s that much-anticipated time of year again…tax season! If you are considering a continuing care retirement community (also known as a CCRC or life plan community), there is an important tax consideration that you may not be aware of. Many new CCRC residents can qualify for a tax deduction on their entry fee and monthly fees.

CCRC tax deductions

CCRCs provide an array of residential units, beginning with independent living and also including different level of assistance or long-term care. Most CCRCs require a sizable one-time entrance fee and then monthly fees thereafter, which are paid in exchange for certain lifelong medical and long-term care services.

Yes, most CCRCs’ entrance fees are hefty, and yes, the monthly fees at a CCRC are typically higher than the rent for a comparably sized house or apartment (one that does not offer lifetime access to healthcare services), but seniors who itemize their taxes may be able to deduct a portion of these fees as medical expenses.

According to a 2012 document prepared by Paul Gordon of HansonBridgett, “Portions of entrance fees and monthly fees paid by independent living residents of a CCRC or other ‘lifetime care facility’ are deductible to the extent that they represent a charge or pre-payment for future assisted living or skilled nursing care.” This is almost always the case with a Type-A (lifecare) residency contract, and to some extent also with a Type-B (modified) contract.

See an explanation of CCRC contract types>>

However, I have seen instances where even residents who have a Type-C (fee-for-service) residency contract may also qualify for a tax deduction. This is because, as described in the same HansonBridgett document I referenced above, some providers calculate the potential allowable deduction using a subsidy/actuarial approach. “To the extent entrance fees or independent living monthly fees are used to subsidize assisted living and skilled nursing operations,” says Gordon, “they should be deductible as prepaid medical expenses. One way to calculate the prepaid medical expense is [for the senior living provider] to divide the dollar amount of the annual subsidy needed to run the assisted living and skilled nursing departments by the number of independent living residents and multiply that number by the average life expectancy of independent living residents.”

Move now and save more

If moving to a continuing care retirement community is on your radar, making the move sooner rather than later could make sense from a tax perspective– here’s why:

Tax-deductible medical expenses include things like health insurance premiums (including Medicare premiums), long-term care insurance premiums, prescription drugs, assisted living and nursing home care, and many other out-of-pocket healthcare-related expenses.

In 2013, the adjusted gross income (AGI) threshold for healthcare expense deductions went up; medical (and dental) expenses in excess of 10 percent of a taxpayer’s AGI are now deductible–previously, the threshold was 7.5 percent, so taxpayers could deduct more of these expenses.

However, in creating the new rules for deducting healthcare-related expenses, Congress exempted people age 65 and older from the new 10 percent of AGI threshold increase until 2017. As a result, seniors age 65 or older can still use the 7.5 percent threshold for deducting medical and dental expenses for any tax year ending before January 1, 2017, as long as the taxpayer or their spouse was 65 or over during or before the tax year.

If you itemize your taxes, medical and dental expenses are deductible on Schedule A of your return. So as an example, if you are 65 or older and your AGI is $100,000, medical and dental expenses above $7,500 (7.5% x $100,000 = $7,500) are deductible for you. CCRC entrance fees and monthly fees would easily reach this threshold for many seniors.

Do Your Due Diligence 

The information provided above should not be construed in any way as tax advice. Consult with a knowledgeable tax advisor who is well-versed in CCRCs before deciding if you qualify for a deduction. There may be additional court rulings that have taken place since 2012 that could impact the availability of deductions. Ultimately you as the tax payer are responsible for any deductions claimed.

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