Continuing Care Retirement Communities (CCRCs) have become an attractive option for many individuals making decisions regarding their long-term care future. These communities offer several levels of health care on one campus including independent living, assisted living, skilled nursing care, and memory care. With the number of CCM clients who are caring for their parents or considering their own future living and care arrangements, we wanted to provide some insights on how we advise you to factor in potential tax deductions related to the various care options that are available.
Key factors that impact tax deductibility include the following:
• the types of fees being paid to a CCRC,
• the extent to which the fees are refundable or create equity,
• the use of and accounting of those fees by the CCRC, and
• the ways that medical related costs are allocated amongst the residents.
While CCRCs will not provide tax advice, it is common for them to provide the relevant data to aid in calculating the appropriate tax deductions.
One common arrangement for someone entering a CCRC at the independent living stage is to pay an entrance fee along with a monthly residential fee that would not change (other than inflationary increases) even after advancing to the assisted living and skilled nursing care levels within the CCRC. Under this type of arrangement, a portion of the entrance and monthly fee would represent a prepayment of future medical care. Numerous IRS rulings have established the deductibility of these charges as medical expenses. The deductible percentage is established based on the cost structure of the specific CCRC, but typically will fall within a range of 30%-40%. With entrance fees often exceeding $100,000 in these types of arrangements, the potential tax deductions could be substantial.
Another common arrangement includes the purchase or rental of a unit and monthly fees that are directly related to the level of care required. Under these scenarios, the tax deduction will be limited to direct medical expenses paid while at the independent living level. The level of tax deduction would then increase as the resident advances to assisted living, skilled nursing care, or memory care. The fees that qualify for a tax deduction as medical expenses under these contracts will eventually become 100% of all fees paid including room and board, meals, and personal care services.
Due to the complexities and ever-changing options being introduced by CCRCs (and other long-term care facilities), please know that our Tax Team is here to work with you as you weigh the choices available.
Feel free to reach out to us if you have any questions about the tax ramifications of the various options.