Continuing care retirement communities, also called CCRCs or life plan communities, provide services spanning the full continuum of care. New residents of CCRCs typically live fully or mostly independently, and are often still quite active in many cases, but have assisted living, memory care, and/or skilled nursing services available when needed.
Many retirees, and even some CCRC residents, are not aware of an important tax deduction often available to residents of CCRCs, whereby a fairly sizable portion of the entry fee (if applicable) and the monthly fee may be tax deductible as a medical expense (IRS Publication 502), even when healthcare services are not being currently being received. The financial structure of a CCRC is such that some portion of a resident’s fee is considered a pre-paid medical expense and therein lays the main reason for the deductibility of fees. Yet, the availability and size of the tax deduction depends in large part on the type of residency contract offered by the community.
A full analysis of this topic is beyond the scope of this post but here are a few key details related to CCRC tax deductions:
- CCRC residents do not need to be receiving healthcare services in order to take the deduction. It is often available to residents living independently.
- In the case of refundable entry fees, deductions should only be taken on non-refundable portions. If a resident deducts any portion of the entry fee that is eventually refunded then the refund will likely be taxable when paid.
- Under current tax code, medical expenses exceeding 7.5% of adjusted gross income (AGI) are tax-deductible for those are age 65 and older. (Beginning in 2017, this threshold increases to 10%. Click here to learn more.) Therefore, any portion of the entry fee and/or monthly fee that is considered a pre-paid medical expense would need to be added to other medical expenses for the year to determine the total deductible amount.
- Deductions are most likely available for residents who have a lifecare contract (Type A) or a modified contract (Type B). To a lesser extent, even residents with a fee-for-service (Type C) contract may be allowed a tax deduction.
- To determine the amount of a resident’s monthly payment that qualifies as a medical expense, a CCRC’s financial officer or auditor will recommend an appropriate formula. A deduction equivalent to 30-40% of the entrance fee and/or monthly service fee is not uncommon but this can vary dramatically from one continuing care retirement community to another.
- If adult children pay some or the entire entrance fee, they may receive a deduction. However, other factors are involved in this determination, including the amount of total financial support provided for their parents.
For detailed information on this topic I suggest reading the document available here. It offers the most complete analysis I have found on this topic. Please note, however, that it was written in 2012 so some of the information could be out of date. As noted in the document, tax deductions at CCRCs have come under increased scrutiny in recent years. Be sure to confirm the information with a knowledgeable tax advisor before making any decisions related to your own situation.
The information in this post should not be construed as tax advice. Please consult with your tax professional.