Here at myLifeSite we are frequently asked about medical expense tax deductions at a continuing care retirement communities (CCRCs, or “life plan communities”). In this post we’ll cover the details about this deduction, but please be sure to consult with your accountant or tax preparer before making any decisions.
What is the medical expense tax deduction?
First and foremost, it’s important to understand how the medical expense tax deduction works. If your qualifying 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. NOTE: This deduction would only be available if you itemize your tax return rather than taking the standard deduction.
(Update: In 2017 the threshold changed to 10% from 7.5)
Medical expense tax deductions in a CCRC
For residents of continuing care retirement communities, let’s say you move into an independent living residence; 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 on a portion of the entry fee (in year one) and the ongoing monthly fees, assuming you qualify based on the above description.
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 prepaid 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.
>>Learn about CCRC residency contract types
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 community representatives suggest 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, adjusted gross income, and how healthcare expenses are handled at the retirement community, per the type of residency contract.
Calculating your medical expense tax deduction
Many 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. This is less so with a Fee for Service (Type C) contract, which is why there generally isn’t a deduction available for that type of contract.
There is a fairly complex formula to this equation each year, and your CCRC will likely 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.
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.
