Are Nursing Home Costs Tax Deductible?

Long-term care costs can cause serious damage to your retirement savings. The U.S. Department of Health and Human Services estimates that 27% of Americans who turn 65 in this year will have to pay at least $100,000 for long-term care, and nearly 18% will need care exceeding $250,000. This is a difficult pill to swallow for seniors.

However, if you need long-term care, you might be able to deduct some of the expenses from your tax return. You may also be eligible to deduct premium payments if you have purchased long-term-care insurance to cover these costs. Understanding how tax deductions can offset long-term care costs is important in retirement planning.

Long-term care costs. If certain conditions are met, you can deduct unreimbursed long-term care costs as a medical expense. This applies to eligible expenses for in home, assisted living, and nursing-home services.

First, long-term care must meet medically required criteria. This could include personal, preventive, therapeutic or treating services. For a complete list of qualified services, see IRS Publication 502.. If the primary reason for your visit is to receive qualified medical care, you will be charged for meals and lodging in an assisted-living facility.

Also, the care must be provided for a chronically ill individual and under a care plan that has been prescribed by a licensed healthcare practitioner. If a person can’t do at least two daily activities, such as dressing, eating, or bathing, without assistance for more than 90 days, it is considered “chronically sick”. The condition must have been documented in writing within the past year. If supervision is required to ensure safety and health, anyone with severe cognitive impairments, such as dementia is considered chronically ill.

You must include the deduction in your tax return. This is becoming less common since the standard deduction has been nearly doubled under the 2017 tax reform law. Additionally, medical expenses can only be itemized if they exceed 7.5% your adjusted gross income.

If the parent is a dependent, an adult child can claim a deduction for medical expenses on his tax return.

Insurance premiums. A limited deduction is allowed for certain premiums for long-term care insurance. This is similar to the long-term care deduction. It’s an itemized deduction for medical costs. Only premiums above the threshold of 7.5% AGI are exempted. The self-employed may be allowed to deduct long-term-care insurance premiums as an adjustment to their income.

For the premiums to be deductible, insurance policies must meet certain criteria. It cannot cover long-term care services, for example. This means that the deduction can only be applied to traditional long-term-care insurance policies. It does not apply to hybrid policies which combine life insurance with long-term care benefits. Jesse Slome is the executive director of the American Association for Long-Term Care Insurance.

There is an age limit on the deduction. The cap for 2021 is $5,640 if your age exceeds 70. It’s $4,520 if your age is 61-70. And $1,690 for those aged 51-60. It’s $850 for those aged 41-50 and $450 for those 40-plus.

As we age, our impact increases

People in their sixties and seventies are not likely to benefit from these deductions. Slome claims that the deductions are valuable for those in their seventies or older.

Why? One reason is that income tends to decrease in retirement so deductions can have greater impact on tax liability. Senior citizens are more likely to have medical expenses that exceed 7.5% of your AGI. According to the IRS, two-thirds (or three-quarters) of all medical expense deductions are claimed by them. These deductions can increase your total itemized deductions beyond the standard deduction amount. As you get older, your chances of meeting the medical necessity requirements to deduct care costs increase. The cap on the premiums deduction drops after 70.