Today, more and more adults of retirement age are choosing to release the hassles of homeownership and move to a senior living community. Healthy seniors have a wide array of options to choose from, including senior-specific independent living communities or ones that boast a full continuum of care services. The latter, referred to as Continuing Care Retirement Communities, or CCRCs, arguably offer seniors the most options for a healthy lifestyle now and in the future.
Considering the host of services and campus amenities CCRCs provide, it’s not surprising that the possibilities available at such a community are reflected in the cost. Many seniors looking into a CCRC for the first time may be surprised by the sticker-shock surrounding the entrance fee, but what many seniors don’t know is that – among the many benefits of these all-inclusive communities – are surprisingly large tax breaks that make those high entrances fees a little easier to manage.
TAX DEDUCTIONS AT A CCRC
Unlike other independent living communities that only offer living accommodations, amenities and non-medical services such as housekeeping, Continuing Care Retirement Communities provide all these things plus a care continuum that typically includes assisted living, skilled nursing, rehabilitation or memory care services. Some senior couples choose a CCRC when one partner requires more advanced care than the other. Sometimes, seniors simply enjoy the peace of mind they have knowing that care is available if they ever need it in the future.
Because of the health care services available at CCRCs, residents are able to report a portion of their cost of living as tax-deductible medical expenses. Even if those services are not yet being used, the IRS considers the costs to live at a CCRC as a prepayment for health care expenses. According to the experts, these tax breaks can make a big dent in paying for CCRC benefits.
COMMUNITY CRITERIA FOR TAX BREAKS
According to Philip Moeller from U.S. News, many older adults are eligible for hefty tax breaks when they move into a CCRC. He lists the criteria for these tax breaks in his article, “Retirement Communities May Provide Big Tax Breaks.” To be eligible, the community must:
- Contract services that include health care (assisted living, skilled nursing, memory care)
- Be obligated to provide such services
- Include a non-refundable or partially refundable entrance fee
In the case of a non-refundable entrance fee, the entire amount can be considered for tax deductions. For entrance fees that are partially refundable, only the amount that is not returned if the resident moves out or passes away counts towards tax benefits.
Additionally, part of the monthly residential fees at a CCRC may be eligible for tax breaks as well. Moeller states, “The logic underlying both deductions is that payments entitle residents to lifetime health care as part of their residential agreement, so a portion of their expenses really represents the cost of future health care benefits.”
VALUE OF TAX DEDUCTIONS
As of 2013, the average amount a person could deduct from their taxes for CCRC costs ranged between 30 and 40 percent. The law allows for medical expenses greater than 7.5 percent of adjusted gross income to be eligible for deductions, as well. (This percentage was recently increased to 10.5%, but those born prior to 1950 may still be eligible for the lower rate.)
Let’s consider a couple who moves into a CCRC. Their entrance fee is $200,000, and their monthly rate is $3,000. The couple’s annual income is $100,000 and they are in the 20% tax bracket.
Let’s do the math:
Assuming 35% of the $200,000 entrance fee qualifies as medical expenses, and assuming they have no other medical expenses, they’d have $70,000 in medical expenses. Any amount above 7.5% is eligible for deductions, so $62,500 ($70,000 – 7,500) could be deducted from their taxable income of $100,000. In the 20% tax bracket, this deduction would save them $12,500 (20% of $62,500) in taxes for the year.
The same process goes for monthly fees every year after:
This couple would pay a year $36,000 ($3,000 x 12 months). Thirty-five percent is eligible for deductions ($12,600). $5,100 ($12,600 – 7,500) would count as medical expenses. In the 20% tax bracket, this would save them $1,020 a year (20% of $5,100).
Of course, these amounts are dependent on an individual’s financial situation, but this gives seniors an idea of how much savings they could expect from tax benefits if they move to a CCRC.
GET READY TO MAKE THE MOVE
If you’ve been wondering if a Continuing Care Retirement Community is the right choice for you, we hope that understanding your eligible tax benefits will help you in your decision-making process. Seniors across the country are discovering the remarkable benefits of living at a CCRC, financial perks and otherwise. If you would like more information about your senior living options, feel free to reach out to us at 55Living.