With the median cost for an assisted living facility close to $50,000 and over $100,000 for nursing home care, it would be helpful to find a way to reduce the financial burden of these costs.

Well, if you are able to deduct these expenses on your tax return, you’d substantially reduce your income taxes, maybe down to zero. This tax savings  can make the high cost of care somewhat more affordable.

As expected, the rules regarding deductibility of these expenses are complicated, but we’ll provide you with some tips to help you better understand the rules.

General Rule for Deducting Medical Expenses

On your individual tax return (Form 1040),  you can deduct expenses paid for the medical care of yourself, your spouse, and your dependents, but only to the extent the total expenses exceed 7.5 percent of your adjusted gross income (in 2019 and 2020) and 10 percent thereafter.

Medical care includes qualified long-term care services.

Assisted living and nursing home expenses can qualify as long-term care expenses depending on the health status of the person living in the facility.

Qualified Long-Term Care Services

The term “qualified long-term care services” means necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services and maintenance or personal care services, which

  • are required by a chronically ill individual, and
  • are provided pursuant to a plan of care prescribed by a licensed health care practitioner.

Chronically Ill Individual

A chronically ill individual is someone certified within the previous 12 months by a licensed health care practitioner as:

  • being unable to perform, without substantial assistance from another individual, at least two activities of daily living for a period of at least 90 days due to a loss of functional capacity;
  • having a similar level of disability (as determined under IRS regulations prescribed in consultation with the Department of Health and Human Services) to the level of disability described in the first test; or
  • requiring substantial supervision to protect the individual from threats to health and safety due to severe cognitive impairment.

A licensed health care provider is a doctor, a registered professional nurse, a licensed social worker, or another individual who meets IRS requirements.

Activities of Daily Living Test

For someone to be a chronically ill individual, at least two of the following activities of daily living must require substantial assistance from another individual:

  • Eating
  • Toileting
  • Transferring
  • Bathing
  • Dressing
  • Continence

Substantial assistance is both hands-on assistance and standby assistance:

  • Hands-on assistance is the physical assistance of another person without which the individual would be unable to perform the activity of daily living.
  • Standby assistance is the presence of another person within arm’s reach of the individual that’s necessary to prevent, by physical intervention, injury to the individual while the individual is performing the activity of daily living.

Examples of standby assistance include being ready to

  • catch the individual if the individual falls while getting into or out of the bathtub or shower as part of bathing, or
  • remove food from the individual’s throat if the individual chokes while eating.

Cognitive Impairment Test

Severe cognitive impairment is a loss or deterioration in intellectual capacity that is comparable to, and includes, Alzheimer’s disease and similar forms of irreversible dementia, and measured by clinical evidence and standardized tests that reliably measure impairment in the individual’s short- or long-term memory; orientation as to people, places, or time; and deductive or abstract reasoning.

Substantial supervision is continual supervision (which may include cuing by verbal prompting, gestures, or other demonstrations) by another person that is necessary to protect the severely cognitively impaired individual from threats to his or her health or safety (such as may result from wandering).

Illustration 1: Deducting nursing home expenses.

Robert, who is 79 years old, suffered a stroke and now needs ongoing medical attention. He also requires help eating, bathing, and toileting. On the advice of his doctor, he enters a nursing home that provides the medical and other care he needs. He paid the nursing home $75,000 in 2019.

The entire $75,000 paid to the nursing home is deductible on Robert’s 2019 individual tax return as a medical expense (subject to the AGI limitation) because it is for qualified long-term care services. Robert qualifies as a chronically ill individual because he is unable to perform at least two ADLs.

Illustration 2: Deducting amounts paid to an assisted living facility.

Assume the same facts as above, except Robert does not require ongoing medical attention but still needs help eating, bathing, and toileting. Since he does not require medical care, his doctor advices he enter an assisted living facility instead of a nursing home. The assisted living facility provides him the custodial care he needs. He paid the assisted living facility $45,000 in 2019.

The entire $45,000 qualifies as a medical expense and is deductible on Robert’s tax return (subject to the AGI limitation). Medical care is not a requirement if Robert qualifies as a chronically ill individual and incurs the expense pursuant to a plan prescribed by his doctor (or other licensed health care practitioner).

You have much to consider if you or a family member faces the medical issues above. We can help you understand whether you can deduct your assisted living or nursing home expenses and what this means for your tax liability. Call East Coast Tax Consulting Group today at 561-826-9303 to schedule a consultation.