Assisted Living: Maintaining Some Independence

Most elderly people don’t need nursing homes, but many require help with daily activities. If providing that support isn’t practical for family and friends, assisted living could be the answer.

Assisted living facilities fall somewhere between home care and nursing homes. They can provide various levels of help, depending on the individual’s needs. Assistance can range from basic housekeeping and medication monitoring to special arrangements for these with early-stage Alzheimer’s.

Some facilities have medical centers although the level of care is generally not as extensive as what is offered in a nursing home. Other services include help dressing, bathing, meals and reminders to eat.

In addition, assisted living facilities provide a social environment many elderly people crave.

Over the years, the choices have become increasingly diverse. They now include low budget to luxury facilities, studios to suites, kosher dining rooms, homes that cater to certain ethnic groups, and even facilities near college campuses that cater to alumni.

The federal government only provides minimal oversight of assisted living facilities. It does not provide regulation, as it does nursing homes that participate in federal funding programs. Instead, states license and regulate the facilities and the requirements vary widely so it’s important to carefully investigate any facility you are interested in.

Tally Up the CostsAn assisted living facility in many parts of the country is likely to average about $3,000 a month for basic care. And from there, the costs can increase depending on the services required. Generally speaking, the individuals (or their families) are responsible for paying the bills, rather than government programs making payments. Long-term care insurance can also cover some costs.

Tax Considerations

There are no specific deductions when it comes to assisted living, but there are many IRS rulings that support tax breaks when the primary purpose of the expense is to get medical care. In assisted living, that’s the norm.

Certain costs may be deductible if the assisted living resident has been certified by a licensed health care practitioner within the last 12 months as being unable to:

  • Perform at least two activities of daily living without help for 90 days.
  • Live safely without substantial supervision for 90 days.

If you provide the funds for your parent’s assisted living facility, you might qualify to deduct the payments. If two or more siblings help out, the family members might be able to take turns claiming the deduction via a multiple support agreement. Consult with your tax adviser for more information.

 

Tax Court Okays Medical Deductions

The fees paid by residents of a nursing home or a similar facility are deductible as medical expenses to the extent they are attributed to medical care. But one Tax Court case opened the door to bigger deductions. (Delbert L. and Margaret J. Baker, 122 TC No. 8)
Facts of the case: A resort-like gated retirement community owned by a nonprofit organization provided four different accommodation levels to officers of the U.S. military, their spouses and dependents:

  • Independent living apartments, duplexes and cottages.
  • An assisted living facility.
  • A special care unit for Alzheimer’s/Dementia.
  • A skilled nursing facility.

The Bakers moved into the independent living unit that required them to pay an entrance fee of $130,000, plus ongoing monthly fees. This entitled them to lifetime residence at the California community, which operated a health center. The agreement also gave the couple the right to move to a different unit if their health deteriorated. The Bakers deducted $35,000 of the entrance fee as a medical expense.
Eventually, the couple needed skilled nursing care. Based on the calculations of a committee at the community, they deducted about 40% of the fees (or $16,500) as medical expenses for the 1997 and 1998 tax years. The IRS, using an actuarial method projecting longevity and health care utilization, allowed the Bakers to deduct only $10,000 in monthly service fees.
The Tax Court approved the method used by the Bakers. The Court said the calculations by the committee effectively shifted the burden of proof to the IRS. As a result, the couple’s deduction was increased by more than 50%.
The Court also examined whether the Bakers were entitled to deduct additional amounts for medical use of the pool, spa, and exercise facilities at the community. No deductions were allowed for those expenses because the couple did not establish the portion used for medical purposes.
Remember that qualified medical expenses are deductible only to the extent the annual total exceeds 10% of AGI in 2017 (unchanged from 2016 for people under 65 years old, see note below). Therefore, deductions are more readily available to retirees living on a fixed income than high wage-earners.
Note: if you or your spouse is age 65 at the end of the year, the new 10% of AGI threshold does not take effect until 2017 (the 7.5% threshold will remain in place).

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