Updated: Sep 27, 2020
Mom is in an assisted living facility. Mom and Dad both receive Social Security (total is about $20,000). Dad receives a federal retirement system pension of $35,000.
Because the assisted living facility costs about $3,800 monthly ($45,600 annually) and they have other unreimbursed medical expenses (mostly drugs) of $3,000, Dad has liquidated half of a $100,000 IRA and plans to liquidate the other half next year in order to spread the tax pain over two years. Unless Dad can figure out some tax deductions, Mom’s and Dad’s taxes are going to hurt.
He just might be in luck, however. Depending upon Mom’s condition (and with a bit of planning) the assisted living facility costs might be tax deductible.
The Deductibility of Medical Expenses
Section 213 of the Internal Revenue Code provides a tax deduction for medical expenses to the extent medical expenses exceed 10% of adjusted gross income.
Example: If a married couple over age 65 had gross income of $50,000 and adjusted gross income of $45,000, they would be able to deduct some of their medical expenses not paid for from other source like insurance if the medical expenses exceed 10% of $45,000 (which is $4,500 the last time I checked). If they have medical expenses of $20,000, then they would be able to deduct $15,500 ($20,000 - $4,500).
How Assisted Living Expenses Become Tax Deductible
The key is to determine if Mom is “chronically ill” and to make sure you have a written plan of care prescribed by a physician, nurse, or other licensed medical practitioner.
To be “chronically ill” Mom must either (i) be unable to perform at least two activities of daily living (called ADLs) for at least 90 days, or (ii) require substantial supervision in order to protect her health or safety due to cognitive impairment (in other words dementia). ADLs include eating, toileting, transferring (in and out of wheel chairs and beds), bathing, dressing and continence.
So, if Mom is unable to perform at least two of the ADLs for more than 90 days OR she has dementia and requires close supervision, she qualifies as “chronically ill.” Make sure to get the written plan!
If Mom is in the assisted living facility because she needs a “little help” Dad could have some problems. On the other hand, if Mom cannot get in and out of bed, bath and eat by herself, or if she is perhaps in the Memory Care unit, Dad will be able to use the assisted living facility costs as a potential medical deduction.
Deductible Assisted Living Facility Costs
To return to Mom’s and Dad’s situation above, they have $48,600 of medical expenses (the assisted living facility costs and the unreimbursed drug expenses). If Dad figures adjusted gross income of, say, $90,000, then he can deduct the expenses over 10% of $90,000 ($9,000). Which, by the way, is another reason spreading the IRA withdrawals over two years helped, because had he taken all the IRA in one year his adjusted gross income could have been around $140,000 thus giving him a higher 10% threshold to get over ($14,000 instead of $9,000).
The deduction of $39,600 ($48,600 - $9,000) should help out a great deal!
Bob Mason, owner of Mason Law, PC, is a board certified elder law and special needs law attorney with offices in Charlotte and Asheboro. www.masonlawpc.com