I recently posted a new video in our video library about medical expense tax deductions, and more specifically, medical-related fees at a continuing care retirement community (CCRC, or life plan community). It’s another topic we are asked about quite frequently here at myLifeSite.
Always consult with your accountant or tax preparer, but generally speaking, for CCRC residents, a tax deduction may be available to you on a portion of your entry fee, as well as a portion of your ongoing monthly fees.
What is the medical expense tax deduction?
First and foremost, it’s important to understand how the medical expense tax deduction works. If your medical expenses over the course of a tax year exceed 7.5 percent of your adjusted gross income (AGI), you can deduct that difference. This is true for anyone, whether you live in a retirement community like a CCRC or not.
Put another way, any expenses over 7.5 percent of your AGI are deductible from your taxes. However, this deduction would only be available if you itemize your tax return rather than taking the standard deduction.
Medical expense tax deductions in a CCRC
For residents of continuing care retirement communities, let’s say you move into an independent living residence at a CCRC; you are healthy overall and require no on-going care services. Some are surprised to learn that even in this case you may still be able to take the medical expense deduction, assuming you qualify based on what I described previously.
The reason for this is because with some CCRC residency contracts, a portion of your entry fee and monthly fee may be applied toward future medical expenses. Essentially, this portion is considered a pre-paid medical expense, and thus may be included as part of your annual medical expenses.
For a lifecare contract (Type A) and, to a lesser degree, a modified fee-for-service contract (Type B), it is more common that a portion of your fee is considered a pre-paid healthcare expense. In rare circumstances, a smaller deduction may even be available for a fee-for-service contract (Type C), if it can be clearly shown by the organization that some part of the fee(s) is being used to subsidize the cost of care delivered by the community.
This is why it is very important to understand exactly what type of CCRC contract you have as it can greatly impact your tax situation now and into the future. Click here to learn more about CCRC contracts and more.
Impact of a for-profit vs. not-for-profit CCRC
There is some confusion about whether such a tax deduction is only available at non-profit CCRCs. Surprisingly, I’ve even heard some sales counselors at a retirement community say this.
But you should understand that this deduction has nothing to do with the tax status of the retirement community. It is based purely on your personal medical expenses, AGI, and how healthcare expenses are handled at the retirement community per the type of residency contract.
Calculating your medical expense tax deduction
CCRCs work a bit like the concept behind an insurance company where everyone who lives in the community is paying in, and a portion of those payments covers the costs of medical care for the residents who need it.
There is a fairly complex formula to this equation each year, and your CCRC generally will send out an annual letter to inform residents what that amount is based on the community’s budget and expenses for the year. You can share this letter with your CPA or tax advisor, and they will know where to input that figure, in addition to any other medical expenses you may have incurred for the year, into your tax forms.
To be clear, this blog post is not intended to be tax or financial advice but rather to make you aware of this potential deduction. Please talk with your tax or financial professional before making decisions about anything related to tax deductions and your unique tax situation.
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