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Elder care: the
tax angle
Uncle
Sam will help pay for putting your parents in a nursing home-and
we don't mean through Medicaid. Check out these tax tactics.
IT'S NOT OFTEN that accountants get to be instant heroes these days.
Turns out most taxpayers didn't know she could deduct the cost of
a nursing home on their own tax return.
Ever since Congress (in 1986) raised the hurdle for the medical
deduction, many a taxpayer has chosen not even to track these expenses.
The hurdle is 7.5% of adjusted gross income, and you can only deduct
amounts above that. With AGI of $200,000 and medical expenses of
$16,000, your deduction would be limited to $1,000.
In addition, Congress liberalized the rules on deductibility of
long-term care in 1996. But because the IRS has yet to issue regulations
for the law, parts of it are gray indeed.
If you have a parent or other elderly relative who needs assistance
with daily life, take another look at the rules. In some cases you
may even be able to deduct the medical bills on your own return.
Here's a guide to the best current thinking on this subject. For
more information, get Publication 502, Medical and Dental Expenses,
available from the IRS or on the Internet at www.irs.gov.
First, the cost of a true nursing home clearly qualifies for a write-off.
If Great Aunt Jane is confined to a skilled nursing facility where
she is fed, bathed and attended around the clock, the expense is
fully deductible.
If you makes a big up-front payment to a "continuing care" facility
that guarantees nursing home care should they ever need it, then
that part of the payment attributable to the nursing care is also
fully deductible.
The retirement home should provide you with a statement from an
accountant showing what portion of the entrance fee is a medical
expense. He also notes that some homes refund a portion of the one-time
fee if the retiree moves out or dies within a certain time. If you
or the estate gets such a refund, then the same percentage she formerly
deducted is taxable.
Things get stickier when it comes to "assisted living" facilities
and home health care because of the 1996 law changes. Boiled down,
the law looks hardest at two criteria. The first is whether the
individual is unable to perform two or more of six "activities of
daily living": eating, toileting, transferring, bathing, dressing
and continence. The second is whether the expenses are the result
of a "plan of care" devised by a licensed doctor, nurse or social
worker. The answers to these questions determine what portion, if
any, of the cost is deductible.
First consider people who fail the first criterion. These are able-bodied
residents who live in a retirement home as a matter of convenience
for now and can still perform five or all six of those basic activities,
perhaps even drive to a bridge tournament or a tennis game.
Yet they still get a small deduction because there are on-site medical
services, such as staff trained to deal with a fall. The fraction
of the nursing home cost that is considered medical usually lies
between 10% and 25%; a statement from the home's accountants provides
the number.
For people who cannot perform two or more of the basic activities,
the deduction can be much larger. As long as a "plan of care" is
in place (this is not tough to get), the medical deduction is equal
to the entire cost of personal care. Again, the home's accountants
should weigh in with a statement, but typically 50% or so of the
annual fee is deemed to be due to personal care, as opposed to the
real estate.
What about home care? Clearly medical expenses, such as the cost
of blood pressure monitoring by a licensed health aide, are deductible
in any event. But if the patient can't perform two of the basic
activities and has a plan of care requiring, say, meal preparation,
bathing and bed changing, the home care may be fully deductible,
too.
What if a relative is providing the assistance? Here you may be
on shaky ground, unless the relative is licensed. If he or she isn't,
take special pains to prove the need and have a detailed plan of
care. Don't forget to file and pay household employee taxes.
Got all that? Here's a comforting thought: The IRS seldom audits
medical deductions for the elderly. Says CPA's, who specializes
in taxes for the elderly. The IRS dose not want one of these returns
audited. They thought juries wouldn't be sympathetic."
Be sure to consult with a tax advisor for proper planning and implementation
of tax savings ideas to be sure they are right for you.
C.
David Pitzer, CPA, PC
118
Two Mile Pike
Goodlettsville, TN 37072
(615) 851-2727
Fax: (615) 851-8711
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