Is Assisted Living A Tax Deductible Expense
Over one million seniors live in Assisted Living communities across the United States and many of them pay their monthly fees with their own financial resources. The good news is that some or all of the costs of Assisted Living and Alzheimers care may be tax deductible.
These are the basic rules concerning the tax deductibility of Assisted Living and Alzheimers care expenses:
What Is Attendant Care And Care In A Facility
Attendant care is care;given by an attendant who does personal tasks which a person cannot do for themselves. This includes care in certain types of facilities.
You can claim amounts paid to an attendant only;if the attendant met both of the following criteria:
- They were not your spouse or common-law partner.
- They were 18 years of age or older when the amounts were paid.
An attendant who is hired privately will probably be considered an employee. For more information, see Guide RC4110, Employee or Self-employed?
Can I File As Head Of Household If I Care For An Elderly Relative
If you meet the following requirements, you may benefit from filing as head of household:
- Youre unmarried or considered unmarried on the last day of the year.
- Youre eligible to claim your parent as a dependent based on the above criteria, even if they dont live with you full-time.
- You paid more than half the cost of mortgage, rent, or managing your parents home.
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Individual Vs Group Insurance
An individual long-term care insurance policy is a contract between you and the insurer. These policies must be approved by the California Department of Insurance and have all of the consumer protections required under California law. Individual policies are “guaranteed renewable” and cannot be canceled by the insurance company unless the premium is not paid on time. However, every company has the right to increase the premiums it charges with proper notification and approval from the Department of Insurance.
Group long-term care insurance is a contract between an insurer and a group such as an employer on behalf of its employees or a trade or professional association on behalf of its members. If you are covered under a group plan, you receive a “certificate” rather than a “policy” of insurance. Also, many of the policy terms have already been negotiated by the group, and the group has the option to terminate the policy at any time. Often, but not always, group insurance is less expensive than individual insurance. If group coverage is terminated, you have the right to continue the coverage or buy a conversion policy depending on the provisions of the policy and other factors. If you purchase group coverage, ask about what options will be available to you if the group cancels the policy or if you lose your membership or eligibility.
Be sure to ask if the premiums will change and ask how you will be notified.
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What Is Inflation Protection
Inflation Protection is intended to help maintain the value of the benefits you purchase today so they will keep up with future increases in the cost of care. In the past, long-term care costs in California have increased at an annual rate of more than 5%.
Protecting against the rising cost of care is one of the most important choices you will make. Inflation protection increases the Daily Maximum, the Maximum Lifetime Benefit and other benefit amounts. If you purchase individual long-term care insurance, your insurer must offer you at the time you purchase the policy the option to purchase an inflation protection feature. Your insurer must offer inflation protection which is no less favorable than the following options: Increases benefit levels annually so that the increases are compounded annually at least 5%; or a Benefit Increase Option.
While the premiums are designed to remain level, insurance companies may apply for rate increases that, if approved by the CDI, will increase your premium in the future.
2. Benefit Increase Option. This option allows you to pay an additional premium to increase the benefit coverage amounts at stated intervals during the life of the policy . There are usually a limited number of increase options offered to you over the life of the policy. If you decide not to exercise this option one or more times when it is offered, you will lose any chances to increase your benefits in the future.
Medical Costs Related To Alzheimers Care That You May Be Able To Deduct On Your Tax Return:
An individual with dementia incapable of caring for his or herself may be considered a dependent for tax purposes, and you may be allowed to itemize medical costs which have not been reimbursed by insurance.;
The list of allowable itemized expenses includes:
- Medical fees from doctors, hospitals, laboratories
- The list of allowed medical fees can cover personal care services, food and lodging at an assisted living community. A licensed healthcare professional has to certify in writing that the assisted living resident has a severe cognitive impairment, such as Alzheimers disease, dementia or other form of irreversible loss of mental capacity that requires substantial supervision to be protected from threats to their health and safety
- Home health care and visiting nurse agency fees related to medical care
- Prescription drugs costs
- Transportation to receive medical care
- Home modifications, such as handrails and shower grab bars
- Personal care items, such as disposable adult briefs
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Claiming A Relative With Dementia Or Alzheimers Disease As A Dependent
If you care for a relative that suffers from dementia or Alzheimers disease, the IRS allows you to claim them as a dependent for tax purposes.; This will allow you to itemize and deduct out-of-pocket expenses for medical care that are not covered by insurance or cover them with your workplace flexible spending account .
Free Tax Help For Older Adults
Unsure if you’re claiming the correct health care and medical expenses? You don’t have to go through this process alone! There are several free tax services to help older adults prepare their tax returns. Take advantage of these important resources:
AARP Foundation Tax-Aide: The AARP Foundation Tax-Aide provides free tax assistance to low to moderate income taxpayers age 50 or older.
IRS Free File: The IRS Free File program is a partnership with brand-name tax preparation and software companies to provide federal income tax return preparation at no cost. Note: Not all IRS Free File partners offer free state tax services. Be sure to check with the company if both federal and state are free of charge.
Tax Counseling for the Elderly : The TCE program, offered through the IRS, provides free tax assistance for all taxpayers, specializing in helping adults age 60 years or older with pension and retirement-related questions.
Volunteer Income Tax Assistance : Through the IRS, the VITA program offers free tax return preparation to qualified individuals. People with low to moderate incomes, disabilities, and limited English-speaking taxpayers qualify for VITA.
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Medical Expense Deductions For Self
The IRS defines self-employed as individuals who:2
- Are in business for themselves, including a part-time business
- Carry on a business or trade as an independent contractor or sole proprietor
- Are a member of a partnership that carries on a business or trade
If you’re a self-employed senior and have a net profit for the year, health insurance premiums such as Medicare, Medicaid, Medicare Supplement Insurance and qualified long-term care insurance can be claimed as a health insurance deduction. These expenses will serve as a deduction toward your adjusted gross income. They are not part of the 7.5 percent rule or an itemized deduction.
What Paperwork Do I Need To Deduct My Mother’s Nursing Home Expenses On Her Taxes She Has Dementia And I Will Be Completing Her Taxes For Her As Power Of Attorney
The statements from the nursing home can substantiate the expenses paid by your mother for her care.; Retain this information in the tax records and you can use this for her medical expenses deduction.
Nursing Home -;
Don’t include the cost of meals and lodging if the reason for being in the home is personal. You can, however, include in medical expenses the part of the cost that is for medical or nursing care.
The TurboTax article will provide more detail about medical expenses and deduction.
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Helping An Elderly Loved One File Taxes
Even if your relative doesnt qualify as a dependent, they may need your help filing taxes. Tax preparation for the elderly is often more involved, due to contributing factors like retirement benefits, assets, and unique tax credits. The IRS Tax Guide for Seniors,;Publication 544, offers information on credits and deductions.
Can You Write Off Assisted Living On Your Taxes
Yes, if you live in an assisted living facility, you can generally write off a number of medical expenses included in the fees for assisted living as well as other qualified long-term care services on your taxeswith some qualifications and restrictions, of course.
In addition to this, the federal government also recognizes the financial burden on family members who help pay for assisted living for a loved one. That means that if you have a senior dependent in assisted living that is considered a dependent, then you may be able to take this deduction.
Or if you contribute more than 10% in support as part of a multiple support agreement that pays 50% or more of the residents support, you may also still be eligible for the deduction.
The IRS usually considers a qualifying relative to be a father, mother, grandparent, mother-in-law, father-in-law, stepmother, or stepfather. Here is information about claiming a parent as a dependent.
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Is Mom Chronically Ill
The key is to determine if Mom is chronically ill and to make sure you have a written plan of care prescribed by a physician, nurse, or other licensed medical practitioner.
To be chronically ill Mom must either be unable to perform at least two activities of daily living for at least 90 days, or require substantial supervision in order to protect her health or safety due to cognitive impairment . ADLs include eating, toileting, transferring , bathing, dressing and continence.
So, if Mom is unable to perform at least two of the ADLs for more than 90 days OR she has dementia and requires close supervision, she qualifies as chronically ill. Make sure to get the written plan!
If Mom is in the assisted living facility because she needs a little help Dad could have some problems. On the other hand, if Mom cannot get in and out of bed, bath and eat by herself, or if she is perhaps in the locked Alzheimers unit, Dad will be able to use the assisted living facility costs as a potential medical deduction.
Senior Living Tax Deductions
For senior living expenses to be tax deductible, the resident must be considered chronically ill. This means a doctor has certified that the resident either:
- Cannot perform at least two activities of daily living,;or
- Requires supervision due to cognitive impairment .
In addition, personal care services must be provided according to a plan prescribed by a licensed health care professional. A doctor, nurse, or social worker must prepare a plan that outlines the daily services and care a resident will receive. Most assisted living communities create;care plans for residents, which can be used to determine tax-deductible services. This means independent and retirement communities generally dont qualify as deductions.
Expenses must also exceed 7.5% of a seniors annual income to be tax-deductible.
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How To Save Money When Hiring A Senior Caregiver To Provide Private Duty Care For A Loved One
Hiring an in-home senior caregiver can be costly. The good news: There are tax breaks that can help offset your care costs.
To determine which tax breaks you may qualify for, you first need to determine who the employer is. . In most cases, the employer of a;senior caregiver;is the person receiving care or their spouse. However, its also possible for an adult relative to be considered the employer especially if the elderly person is living in their home.;
Lets take a look at the tax breaks associated with each employment scenario.
Tax Credit For Other Dependents’
Taxpayers have long been able to claim a tax credit for children up to age 16. Unlike a deduction, which lowers your taxable income, a tax credit directly reduces your tax bill. The 2017 federal tax law expanded the Child Tax Credit to allow taxpayers to claim up to $500 as a nonrefundable Credit for Other Dependents, including elderly parents.
Under this provision, in effect through the 2025 tax year, the Internal Revenue Service allows family caregivers to claim some individuals related by adoption, blood or marriage and even some friends as other dependents on their federal tax return as long as both parties meet these IRS requirements:
The IRS has an interactive tool to help you determine if a dependent qualifies you for a tax credit.
Tips for filing
- Keep detailed records. For example, create a log to show the dependent lived with you for at least half the year.
- Keep receipts and keep a written log of all related expenses. This record will ensure you don’t miss any allowable deductions, and it can serve as part of your documentation if you are audited.
- Be aware that adding a dependent makes them part of your household, which could have implications in areas such as Medicaid eligibility or the cost of health insurance purchased through the Affordable Care Act marketplace.
Bonus: Head of household status
A parent does not need to live with you for you to claim head of household status. Any other relative must have lived with you for at least half of the tax year.
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What About Taxable Disability Benefits For Seniors
If your elderly loved one retired early on disability, taxable benefits from their employers disability retirement plan are considered earned income until they reach minimum retirement age. Thats the age when they would have received a pension or annuity if they hadnt been disabled.
Thoroughly review the details of your relatives disability retirement plan for some companies, payments count as gross income through age 72.
How Much Medical Expenses Can Be Deducted
Secondly, the medical expenses must be of the type approved by the IRS as qualifying for the medical expense deduction, Luscombe says.
To qualify for the deduction, the total cost of your eligible unreimbursed medical expenses must exceed 7.5 percent of your adjusted gross income . For example, if your AGI is $50,000, then the first $3,750 of medical expenses are not deductible. Any eligible expenses above this amount would then be deductible. If you incurred $4,750 in medical expenses in 2020, then you would only be able to deduct $1,000 .
This may seem like a high threshold, but consider the average costs of health care and long-term care in this country. According to Genworths 2020 Cost of Care Survey, the median monthly cost for a mere 20 hours of home health care per week totals $2,080. In a year, this adds up to $24,960! The median cost of an assisted living facility is $4,300 per month, and a semi-private room in a nursing home is $7,756 per month. Most caregivers can easily reach their deduction threshold if they are helping an aging parent pay for long-term care services.
If all these requirements are met, a caregiver can get significant tax benefits from writing off their own medical expenses, those of their spouse, if applicable, and those incurred on behalf of the person they care for, notes Luscombe.
To see what your standard deduction is, visit IRS.gov to use the How Much Is My Standard Deduction? tool.
How Much Do Insurance Policies Pay/reimburse For Long
The Daily Maximum – It is important to understand the coverage provided and how benefits will be paid/reimbursed before you purchase a Long-Term Care Policy. If you decide to buy a long-term care insurance policy, you will select a maximum daily benefit. It is important to note that the minimum home care daily benefit you can select in California is $50 a day. There is no minimum daily benefit for facility care.
Selecting the Daily Maximum – Because you will be responsible for all expenses not paid or reimbursed by your insurance policy, you need to decide how much of the daily cost of care you may need to pay yourself. Estimate the daily cost of long-term care in your community and subtract the amount you can afford to pay for each day of your care.
To help the benefits of your policy keep up with the annual increase in the cost of care due to inflation, every insurer is required to offer you Inflation Protection.
The Maximum Lifetime Benefit – The approximate number of years you want the policy to provide benefits will determine the Maximum Lifetime Benefit. The longer the period of coverage, the higher the premium. Your Lifetime Maximum Benefit is computed by multiplying the Daily Maximum benefit you select by the approximate number of days you want benefits to be paid or reimbursed.