Could You Earn Tax Breaks for Living in a Retirement Community?

With home prices and sales steadily improving in many parts of the country, your parent or loved one may be considering moving into a nursing home – now referred to as a continuing care retirement community (CCRC). Seniors considering moving into a retirement community should know that they may qualify for hefty tax breaks for assisted living and skilled nursing support as part of what are considered lifetime care benefits. And if their children or other family members provide major financial support for entrance fees and monthly expenses, they also may be eligible for ample tax deductions.

Understanding Your Retirement Community Options

There are many different types of retirement communities. Nursing homes and assisted living communities offer a high level of senior care. 55-plus or active-adult communities offer seniors more mobility and independence. CCRCs are highly regulated through state health, insurance and other licensing entities. Whichever type of retirement community you choose, it is important to know what each community has to offer, then weigh all the financial pros and cons.

Amenities and Services of CCRCs

  • Entry fees – Most retirement communities charge an initial entry fee
  • Maintenance – Repairs and cleaning services are usually included in your monthly payment, this can save cash and physical stress
  • Activities – Many CCRCs organize fitness, games, entertainment and learning activities for seniors. Be prepared to pay more for communities offering additional activities or fitness amenities
  • Medical care – Many CCRCs offer in-house comprehensive medical assistance so seniors don’t have to go to the doctor for minor check-ups or medication

3 Typical Service Contracts for CCRCs

  1. Life Care or Extended Contract – Often the most expensive option offering unlimited assisted living, medical treatment and skilled nursing care without additional charges.
  2. Modified Contract – These contracts offers a set of services provided for a set length of time. When that time is expired, other services can be obtained for an additional monthly fee.
  3. Fee-for-Service Contract – Assisted living and skilled nursing will be paid for at their market rates as needed and initial enrollment fees may be lower.

Research CCRCs in your chosen neighborhood. Visit the facilities, investigate the business thoroughly (financials, managements, care providers) and meet with a representative who can help delineate different housing options, cost structures and contract choices. When you are ready to commit, run the contract by your financial advisor and attorney.

Tax Breaks on Retirement Community Expenses

There are tax breaks available for seniors and their families for certain retirement community expenses. A percentage of CCRC entrance fees, monthly fees and medical expenses may be refundable through tax credits and deductions, even if the resident currently lives independently and requires little or no medical care. Taxpayers can deduct the entry fee in the initial year and may write off medical expenses which exceed 7.5% of adjusted gross income. Significant write-offs are often available because CCRC fees often amount to big dollars.

Estimating Tax Breaks for Seniors Residing at a CCRC

Only medical expenses above 7.5 percent of adjusted gross income may be deducted from income taxes, so the amount of the deduction will depend on taxable income and other qualifying medical expenses.

A couple paying a $250,000 entrance fee and monthly fees of $3,500, which provides them a two-bedroom apartment and access to assisted living and skilled nursing services as needed, $95,000 (38 percent) may be considered a qualifying medical expense.

For a couple reporting $100,000 of taxable income (from Social Security, pensions and investment earnings), only medical expenses above $7,500 could be deducted. If the couple had no medical expenses other than their CCRC entrance fee, they could deduct $87,500 ($95,000 minus $7,500) from their taxable income. If they were in the 20 percent tax bracket, this would save them $17,500 in the tax year during which they paid the entrance fee.

Tax deductions for the monthly fees would work the same way. If the fees totaled $42,000 in a tax year (12 times the monthly fee of $3,500), $15,960 of that amount (38 percent of $42,000) would be a deductible medical expense. If the there are no other medical expenses, the net value of the deduction would be $8,460 ($15,960 minus $7,500) for an additional tax savings. Most seniors will require additional medical expenses, so the CCRC tax benefit could potentially yield a bigger tax savings.

Review Your Retirement Living Plans with a Trusted Advisor

In general, not-for-profit retirement communities are a safe investment as they have been in existence for many years and almost all are sponsored by larger organizations that provide credibility and stability. Organizations which are financed through tax exempt public markets go through a rigorous financial review with on-going financial operating requirements. These reviews are fundamental to maintaining the financial integrity of the organization and to protecting bondholders and residents.

Living in a community where you don’t have to pay separate bills for things like cooking, cleaning, transportation and entertainment can simplify your financial life while living in comfort. For others it makes more sense to live independently in your own home or with family. If you have questions about whether you or a loved one can afford the services of a retirement community or nursing home, speak with your trusted financial advisor, lawyer and insurance specialist to take a look at your financial future. Begin to research your options, be observant and ask a lot of questions. The information you uncover may just help you save money as you move forward with your retirement plans.

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