NURSING HOME COSTS, LONG-TERM CARE SERVICES AND
INSURANCE PREMIUMS DEDUCTIBLE AS MEDICAL EXPENSES
January 8, 2002
We are often asked about the deductibility, for income tax purposes, of
long-term care costs (assisted living facilities, nursing homes, etc.) as a
medical expense on Form 1040 - Schedule A. This newsletter briefly summarizes
the relevant rules for this tax deduction, as well as providing a quick glimpse
at the deductibility of long-term care insurance premiums.
MEDICAL CARE
If an individual is in a long-term care facility which provides medical
treatment, then the determination as to the amount of the costs which are tax
deductible depends on the reason for the individual being at the
facility. Each person’s (taxpayer’s) situation must be evaluated separately.
If an individual is in a facility because of a physical condition, and the
availability of medical care is a principal reason for admission,
then the entire cost of the care (including meals and lodging) is
deductible as a medical expense.
If medical care is not a principal reason for being in the facility, then
only the portion of the cost attributable to medical or nursing care is
deductible (unless the rules below apply).
QUALIFIED LONG-TERM CARE SERVICES
Another category of tax-deductible medical expenses, called “qualified long-term
care services”, allows for the deduction of medical expenses that are due to
cognitive impairment or diminished mental capacity as well as those that are due
to purely physical ailments. The qualifications for this deduction are
discussed below.
Qualified long-term care services
include necessary diagnostic, preventive, therapeutic, curing, treating,
mitigating, and rehabilitative services, as well as maintenance or personal care
services. Expenses incurred to provide these services are deductible only if
the following two criteria are met:
-
The services are required by a "chronically ill individual"
and
-
they are provided under a plan of care
prescribed by a licensed health care practitioner.
A "chronically ill individual" is one who has been certified, by a licensed
health care practitioner within the previous 12 months, as:
-
being unable to perform (without substantial assistance from another
individual) for a period of not less than 90 days, at least two of the
"activities of daily living" due to a loss of functional capacity. Activities of
daily living are: 1) eating, 2) toileting, 3) transferring,
4) bathing, 5) dressing, and 6) continence. Or
-
having a similar level
of disability as determined by the IRS in consultation with the Department of
Health and Human Services, or
-
requiring substantial
supervision to protect the individual from threats to health and safety due to
severe cognitive impairment.
NOTE: An individual who is physically able, but
who has a cognitive impairment such as Alzheimer’s disease or another form of
irreversible loss of mental capacity, is treated similarly to an individual who
is unable to perform (without substantial assistance) at least two activities of
daily living.
An individual who meets these requirements may take a tax deduction for these
costs as medical expenses on Form 1040, Schedule A.
QUALIFIED LONG-TERM CARE INSURANCE
“Qualified long-term care insurance” is insurance that:
·
provides coverage only for
qualified long-term care services,
·
doesn’t pay costs that are covered
by Medicare,
·
is guaranteed renewable, and
·
doesn’t provide for a cash
surrender value.
A policy isn’t disqualified merely because it
pays benefits on a per diem or other periodic basis without regard to the
expenses incurred during the specific payment period.
Qualified long-term care insurance premiums are deductible as medical expenses,
subject to certain limitations. Although the allowable amount varies
significantly with age, it may be possible to deduct up to $2,860 in insurance
premiums per taxpayer. This amount is indexed annually for inflation.
OTHER ITEMS TO NOTE
The costs of qualified long-term care or
insurance for such care aren’t necessarily deductible for all taxpayers. These
expenses are only deductible to the extent they exceed 7.5% of adjusted gross
income (this is the normal limitation that applies to all medical expenses).
In
determining your total medical costs, be sure to include costs that you incur
for your dependents as well as for yourself. For example, a taxpayer paying for
the long-term care of an elderly parent or grandparent may be able to include
these costs along with their own on their tax return. The costs may be included
if the parent or grandparent is the taxpayer’s dependent. For these purposes,
the dependency test will generally be met if the taxpayer is providing over 50%
of the support for the parent or grandparent (including medical costs).
The tax laws referred to above include many
complex rules and definitions; therefore, each person should consult their tax
advisor regarding the proper application of these laws to their individual tax
situation.
