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Prospective residents looking for one more reason to choose your continuing care retirement community (CCRC) might be impressed by the potential tax deductions that a CCRC move could bring them each April 15.
In certain cases, the Internal Revenue Service (IRS) allows older people to deduct a portion of what they pay for CCRC entrance and monthly fees from their taxable income, according to Jerry Grant, executive vice president and chief financial officer of ACTS Retirement-Life Communities, a LeadingAge member based in West Point, PA.
Adult children and other family members who provide major financial support for an older relative’s entrance fees and monthly expenses could be eligible for tax deductions too.
CCRC residents may qualify for a tax deduction if the CCRC contract includes a non-refundable entrance fee and obligates the provider to deliver health care services. Grant recently told U.S. News and World Report that the IRS views these fees as a pre-payment expense for health care services.
Residents can only deduct from taxable income the portion of CCRC payments tied to health care expenses. Nationwide, that percentage ranges from 30% to 40%, depending on the expense structures that individual CCRCs employ.
This year, for example, ACTS residents were able to deduct 36.18% of entrance fees and 38.61% of monthly fees as prepaid health care expenses, says Grant.
What if an entrance fee is fully or partially refundable? Then residents can only deduct the portion of the fee that is not returned to them or their estates, says Grant. Residents can take the full deduction when they pay the entrance fee.
But either the resident or the resident's estate will have to return a portion of the tax deduction if any part of the entrance fee is refunded.
What if the CCRC resident signs a rental contract for independent living expenses but has a “pay as you go" arrangement for assisted living and nursing services? In this case, only payments expressly required for medical services would be tax deductible.
Grant advises consumers to consult with a financial advisor to determine the best way to go about claiming CCRC-related tax deductions.
However, he warns consumers that many financial advisers and attorneys are not familiar with the medical tax deductions linked to CCRC fees.