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Tax Issues Surrounding Long Term Care
Long term care in nursing homes is expensive. More and more often adult children end up paying the expense of nursing home care. If the parent is not eligible for MassHealth or Medicaid paid nursing home costs then they will be paying privately out of pocket for their care. Average nursing home costs are now over $10,000 a month or $120,000 a year. As with any significant financial expense in life, it is important to be aware of the tax issues surrounding nursing home care to maximize any tax benefits. The following is a summary of certain income tax benefits connected both to the fact that a parent or spouse is in a nursing home, as well as indirect results of an admission such as selling a family home or planning for one's own long term care expenses.
Income Tax Deductions for Medical Services: Qualified Long Term Care Services that are required by a chronically ill individual and provided pursuant to a plan of care prescribed by a physician are deductible for income tax purposes to the extent they exceed 7.5% of the individual's adjusted gross income. Examples of services include nursing home care if the individual is in the nursing home principally to receive medical care, necessary diagnostic, preventive, therapeutic, curing, and rehabilitative services. IRS Publication 502 provides further examples of qualified care services. Keep in mind that this deduction may not be meaningful if the individual is drawing on post-tax retirement accounts or other property to pay for expenses and does not have significant income to offset.
If it's your parent in the nursing home, can you claim them as a dependent? This is a common question we are asked and depends on two main factors. If you provide more than 50% of your parent's support costs and your parent does not earn more than $3,650 you may be able to claim them as a dependent. The parent would also need to be a US Citizen and not be filing a joint return with someone else. In addition, if your parent qualifies as your dependent you also can include any medical expenses that you incur for your parent as part of your medical expenses for the year. If you are single you may also qualify for head-of-household filing status if your parent is your dependent and you are paying more than half the costs of their nursing home expenses.
Sale of the Parent's Home: Depending on the nature of the stay in the nursing home, it may become apparent that the spouse or parent will not be able to return home and therefore the home may need to be sold to pay for expenses or simply because it's too costly to maintain a home no one is using. When selling a primary residence, it is possible to exclude up to $250,000 of the gain on the sale if the owner has used the property as their primary residence for two of the last five years prior to the sale (if two joint owners qualify up to $500,000 can be excluded). If the individual can not meet the two out of five year test because they have been living in a nursing home, there is a small exception that may allow them to still exclude a portion of the gain. Determining the tax liability on a sale is an important consideration as many parents who have lived in their homes for decades could have a significant capital gains liability without this exclusion. In some cases, it may make sense for children to rent the property or pay the carrying costs for the property so that instead of being sold during their parent's life, it is sold after the parent passes away when the tax consequences of a sale may be better. This is a straightforward calculation that we can assist you with.
Taxation of Payments from a Life Insurance Contract: If the owner of a life insurance policy is deemed terminally or chronically ill they may be able to receive an accelerated tax free death benefit from a life insurance policy. These funds could then be used to pay for long term care expenses in a nursing home or at home.
Income Tax Deductions for Long Term Care Insurance Premiums: While few people entering nursing homes have long term care insurance since these policies have only recently become popular, after seeing a spouse or parent enter a nursing home you may decide to research whether a long term care insurance policy for yourself makes sense. A portion of the premiums for the policy can be deducted as a medical expenses based on your age. For example, an individual under 40 is allowed to deduct up to $320 in annual premium payments, while an individual over 71 is allowed to deduct up to $3,980 of annual premium payments.
Gift Tax Issues of Paying for a Parent's Care: Adult children with the financial means may end up paying for a parent's long term care or other medical expenses. If these expenses exceed $13,000 a year and are paid to the parent they would be considered a taxable gift by the child and necessitate the filing of a gift tax return. Instead, an adult child should make payments directly to a nursing home or medical provider and not to their parent so that the payments are not considered taxable gifts.
The costs of long term care are substantial and therefore should be minimized to the extent possible by maximizing any available tax benefits. The examples listed above are just some of the possible tax benefits and only after a review of your particular situation can an assessment be made as to your particular situation. The numbers used throughout this article are current as of tax year 2010. Attorney Peter C. Herbst Jr.concentrates in Real Estate and Estate Planning and is currently pursuing a Masters of Law in Taxation at Boston University.