For many aging boomers or their parents, the retirement road eventually leads to what's called a "continuing care retirement community" or CCRC. These places were once called nursing homes and conjured up negative images. That was then. Many of today's CCRCs are decidedly upscale and expensive. But there's good news: a little-known tax break can help cover the cost. Here's the story, starting with how CCRCs work.
Continuing care retirement community basics
As opposed to a traditional nursing home where you simply pay a monthly fee, residents enter into a long-term contract with a CCRC. In exchange for a one-time entry fee and ongoing monthly charges, the CCRC provides housing and a range of on-site services. When a resident's health and personal care needs become more acute, the level of service can be increased to include assisted living, long-term care and skilled nursing care. The big advantage is that the resident doesn't have to move as his or her needs change.
Other available services typically include meal plans, housekeeping, transportation, and social and recreational activities.
The physical layout can range from a campus dotted with cottages, patio homes, duplexes, or townhouses to a high-rise apartment complex. Residential units can range from studio apartments to stand-alone homes with three or more bedrooms. Some CCRCs are quite fancy, even lavish. Depending on the community and the agreed-upon arrangement, the resident may be strictly a renter or have an ownership stake in the real estate.
In areas where real estate is expensive and the resident acquires an ownership stake, the entry fee can be in the upper six figures or even higher. Monthly fees can be $5,000 or more in high-cost areas, depending on the level of care.
How to deduct the costs
Fortunately, a valuable tax break can offset part of the one-time fee to enter a CCRC and part of the monthly fees to stay there. A percentage of these costs count as medical expenses for tax purposes, even if the resident currently lives independently and requires little or no medical care. Taxpayers can only write off medical expenses to the extent they exceed 7.5% of adjusted gross income, but because CCRC fees often amount to big dollars, significant write-offs are often available. Meaningful tax deductions are especially likely in the initial year when the entry fee is paid.
What I've said about CCRC medical expense deductions may sound too good to be true, but it's confirmed by a 2004 U.S. Tax Court decision: Delbert L. Baker v. Commissioner (122 TC 143, 2004). The Bakers started off in the independent living category at an upscale California CCRC. They occupied a two-bedroom, two-bath duplex and had access to medical services from the community's on-site health center. They also had access to other on-site health-related amenities such as a pool, spa and gym. On their tax returns, the Bakers claimed medical expense deductions equal to about 27% of their first-year entry fee and about 40% of their monthly fees for two later years that were audited by the IRS. (These percentages were calculated by a committee of CCRC residents based on financial data supplied by the outfit that ran the community.)
The IRS denied big chunks of the Baker's claimed deductions, and the couple took the case to the Tax Court where they mostly won. Their only losing argument was an attempt to claim medical deductions for expenses allocable to the CCRC's swimming pool, spa, and gym. These types of expenses are only deductible if they are necessary to combat a specific medical condition or illness. Expenses that simply promote general health and fitness cannot be deducted as medical costs.
The bottom line
The amount of CCRC fees that can be treated as medical expenses for tax purposes does not in any way depend on the level of health care services actually received by the CCRC resident during the year in question. It only depends on the community's aggregate medical expenditures in relation to its overall expenditures or overall revenue from fees paid by its residents. Any CCRC worth considering should be able to give you estimates of those percentages, but you may have to ask for them.
Remember: if you will be paying some or all of your parent's CCRC fees, you can claim the applicable percentage of the charges as a medical expense on your return--if you provide more than half your parent's support.
Finally, the IRS says a person must enter into a CCRC-like contractual lifetime care arrangement to claim the tax break I've explained here. It is not allowed to just anyone who enters a retirement facility or nursing home.