Jewish World Review July 14, 2004 /25 Tamuz, 5764
Jan L. Warner & Jan Collins
Are Dad's living expenses tax-deductible?
Q: Not six months after my mother died, my father decided he was tired of cutting grass and dealing with the responsibilities of home ownership. My wife and I were shocked when he told us he wanted to move into a "continuing care" retirement community so he could, as they say, "age in place." We narrowed the search down to two facilities, one of which is connected to a local church and is very established, while the other is more modern, but has been in business for just over three years.
As I understand the rules, my father would pay a rather significant one-time fee when he moves in and then a monthly fee for which he will be guaranteed his accommodations, meals and medical care for the rest of his life. He will sell his house in order to make the first payment, and will supplement his retirement income from his other holdings as need be to pay the monthly fees. A friend told us that part of Dad's payments should be tax deductible. However, we have been unable to find a lawyer or adviser who knows anything about these kinds of contracts. Can you point us in the right direction?
A: When an individual enters into a life care contract with a retirement facility, he or she will generally pay an up-front "founder's fee" and a monthly fee in return for lifetime care, which includes residential accommodations, meals and medical care. Most of these contracts also provide that, under certain circumstances, if the resident leaves, a portion of the founder's fee will be refunded based upon a formula that generally includes a penalty provision.
According to the tax law, the portion of the founder's fee and the monthly fee attributable to your father's medical care should be tax deductible as a medical expense in the year paid. (Keep in mind that your father's aggregate medical expenses must be more than 7.5 percent of his adjusted gross income (AGI) to be tax deductible, and that the amount of that deduction changes depending on one's AGI.) The applicable amount is typically based on the facility's estimate of the fees attributable to your father's medical care. If the facility does not have the requisite financial experience, it can use financial information from a comparable retirement home or community.
If deductions are taken in one year and your father receives a refund of the founder's fee later, the portion of the refund attributable to deductions previously taken must be included in his income.
Generally, the facility should give separate statements to each resident at the time of admission. If not given, then we would certainly question the promise of lifetime care that includes medical care. If, for example, the founder's fee is used to construct capital improvements for homes, apartments or nursing home, none of that payment will qualify as a medical expense and would not be deductible, but a portion of the monthly fee could be deducted as a medical expense.
More and more seniors are choosing to enter staged-care communities that can provide them with needed socialization, activities, appropriate diet and long-term medical care.
However, because of the complexities of these contracts and the cost of this high-end care, it is essential that prospective residents look into not only the deductibility of payments, but also the financial strength of the facility and the long-term affordability of the monthly fees. The fact that these important issues were not brought up by the facilities at your meetings raises a red flag. Since these decisions should not be made overnight or on a whim, we suggest you contact a knowledgeable attorney or have your certified public accountant review the package and explain it before you jump.
More About Medical Deductions: The cost of special equipment installed in your home like an elevator and improvements made for medical reasons like installing entry and exit ramps, widening hallways and installing railings is deductible as a medical expense only to the extent that the modification does not increase the value of the home.
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JAN L. WARNER received his A.B. and J.D. degrees from the University of South Carolina and earned a Master of Legal Letters (L.L.M.) in Taxation from the Emory University School of Law in Atlanta, Georgia. He is a frequent lecturer at legal education and public information programs throughout the United States. His articles have been published in national and state legal publications. Jan Collins began co-authoring Flying SoloŽ in 1989. She has more than 27 years of experience as a journalist, writer, and editor. To comment or ask a question, please click here.
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© 2003, Jan Warner