Did you know that new residents of entry-fee retirement communities may be eligible for a sizable tax deduction that many people may not even be aware of? If you are considering such a community you should be aware of any tax deductions that may be available to you.

Under current tax law residents of continuing care retirement communities may be able to deduct a portion of the entry fee, which can be quite sizable, and possibly some portion of their monthly fees as well.

Here are a few key details to understand:

  • Tax deductions are available only to residents of communities that contractually offer a “continuum of care.” Therefore, retirement communities that do not contractually promise health care services do not qualify. This type of retirement community is generally referred to as a continuing care retirement community (CCRC) or lifecare community. 
  • Some portion of the entry fee must be accounted for by the community as a pre-paid healthcare expense. CCRCs offer different types of contracts, some of which include pre-paid healthcare as part of their fees and others that do not.
  • Only non-refundable portions of the entry fee can be used for tax-deduction purposes. Any refundable portion of the entry fee will not be counted in the formula to determine the deductible amount.
  • Most often a CCRC’s auditor or chief financial officer will recommend an appropriate formula to determine the allowable deduction amount, often providing a written explanation each year for residents. A deduction equivalent to 30 to 40 percent of the entry fee and monthly service fee is not uncommon but it can vary from one community to another.
  • Under the current tax law, if you are age 65 and older and itemize your tax deductions, you can deduct medical expenses exceeding 7.5 percent of your adjusted gross income (AGI). The actual deductible amount will depend on your taxable income and any other qualifying medical expenses. (Note: Through 2016 the threshold remains at 7.5 percent of AGI for those ages 65 and older, but it is 10 percent for those younger than age 65.)
  • If adult children pay some or the entire entry fee, they may be entitled to take a tax deduction. However, other factors must also be considered, including the total amount of financial support they provide for their parents.

 

Note: For specific details see IRS Pub. 502- Medical and Dental Expenses, “Lifetime Care- Advance Payments” Also refer to IRS Revenue Rulings 76-185, 75-302, 76-106, 76-481.

 

Brad is co-founder of My LifeSite (formerly LifeSite Logics), a North Carolina company that develops web-based tools and resources designed to help families make better-informed decisions when considering a continuing care retirement community. Brad previously spent thirteen years as a financial advisor before starting My LifeSite and still maintains the Certified Financial Planner™ certification. His extensive knowledge of the retirement living industry, combined with his financial planning background, allows him to provide valuable insights about lifestyle, healthcare, and financial planning considerations related to this significant life decision. He’s frequently quoted in national media such as Kiplinger’s Magazine, Wall Street Journal’s MarketWatch, USA Today and the New York Times. Brad is the author of a book released in 2014 titled, “What’s the Deal with Retirement Communities?” and speaks regularly for retirement living providers, industry trade organizations, life-long learning classes, and other groups across the country.