By Andrew Keshner
'She was basically directed to go there from a rehabilitation post-surgery'
Dear Tax Guy,
I have an elderly relative in an assisted-living arrangement in Indiana. She was basically directed to go there from a rehabilitation post-surgery, because they determined that she could no longer care for herself.
Monthly living costs include room/board, cost for diabetic care and fees for a package of moderate nursing assistance (which can increase or decrease according to the amount of assistance they deem necessary for her).
Are any of these monthly charges tax deductible as medical expenses?
Looking Out For Family
Dear Looking Out,
I wish your relative a full and speedy recovery. I'll bet this has been tough on her and all her family, including you. The good news is the tax code can help out.
Some, if not all, of the costs you describe are deductible medical expenses, according to the tax professionals I interviewed. Making the medical expense deduction work for your relative may entail some extra effort -- but it could definitely pay off.
Claiming the medical expense can be "a pain in the tail, because it does require keeping records," said Letha Sgritta McDowell, immediate past president of the National Academy of Elder Law Attorneys.
But at a time when medical care is so costly and inflation gnaws at budgets, the money being spent and potential deduction amount is worth it in all likelihood, she said.
Tom Bayer, partner-in-charge of the Indianapolis office for Sikich, a tax, accounting and consulting firm, made the same point. "Part of [the expenses], and potentially all of it, could be deductible," he said. Sure, there's extra efforts to amass records but "unless they are just uber-wealthy, you are going to rack up a lot."
The starting point
The IRS code contains the standard deduction and the itemized deduction. Taxpayers can only deduct medical expenses when they itemize their deductions. In addition to medical expenses, other itemized deductions include mortgage interest, state and local taxes and charitable contributions.
The majority of Americans opt for the standard deduction. Through mid-July, 126.6 million returns claimed the standard deduction while 11.7 million returns were itemized, IRS data shows.
Why the imbalance?
It makes more money sense because the size of the write off that comes from the standard deduction is larger than the size of the write-off that could come from adding up all the itemized deductions.
When Americans file their federal income taxes early next year, the standard deduction will be $12,950 for individuals and $25,900 for married couples filing jointly. For people who are age 65 or older, the standard deduction is $14,700 for individual and $27,300 for married couples filing jointly. There's also an extra deduction amount if the taxpayer is legally blind.
I don't know your relative's age and marital status, but to make money sense, the sum of her itemized deductions would have to exceed the applicable standard deduction amount.
That might be easy to do if we are discussing medical care and assisted living. Last year, the monthly median cost at an assisted living facility was $4,500, according to Genworth Financial
If those estimates are any guide, even a brief stay for your relative may rack up enough costs to turn an itemized deduction into the best move.
The tax details
Taxpayers can deduct the amount of medical and dental expenses that go past 7.5% of adjusted gross income (AGI). For reference, the AGI is the number on Line 11 of the 1040 during tax year 2021. The medical expense deduction is claimed on Schedule A.
Suppose your relative earned $70,000 a year (which is just around this year's median income in America): Applying 7.5% to $70,000 is $5,250, so this initial $5,250 in medical expenses cannot be deducted. But the eligible medical expenses on top of that initial sum can be deducted. Again, there's a strong chance the price of your relative's care goes past that.
So what's deductible?
"Medical care expenses include payments for the diagnosis, cure, mitigation, treatment, or prevention of disease, or payments for treatments affecting any structure or function of the body," the IRS says
That may include hospital care and "residential nursing-home care, if the availability of medical care is the principal reason for being in the nursing home, including the cost of meals and lodging charged by the hospital or nursing home," the tax agency said.
(To be sure, families and healthcare providers know there are differences between assisted living and nursing homes, but IRS explainers on "assisted living" relate back to the tax rules on nursing homes.)
Long-term care can qualify for the deduction as long as it's "required by a chronically ill individual" and also "provided pursuant to a plan of care prescribed by a licensed health care practitioner," the IRS says
Someone's "chronically ill" -- in the IRS view -- if a licensed health-care practitioner says the person cannot carry out at least two parts of daily life without help for at least 90 days. That includes eating, dressing, bathing and using the bathroom.
I don't know the extent of care your relative needs, but she wouldn't be at an assisted-living facility if she didn't need at least some help.
Other eligible expenses include insurance premiums, and that includes Medicare premiums and Medicare supplement insurance. Don't forget prescription co-pays, medical transport costs to travel to appointments and more, McDowell said.
For anyone adding up costs to determine whether to itemize, "once you get close because you do have even a few months of those expenses, it becomes a lot bigger number than most people anticipated," she noted.
There's added steps your relative should consider, McDowell said. For her clients in similar situations, McDowell advises they have their primary-care physician sign a letter saying the person was "chronically ill" or having a "chronic illness" and that the nursing home or assisted-living stay was "pursuant to a plan of care."
There's no need to submit this letter to the IRS, but keep it for records in the event of an audit years later, McDowell said. The same goes for receipts and invoices documenting the cost of the care, she added.
Another place to get something in writing for tax records is the assisted living facility itself, Bayer said. For these facilities, "this is not a new question," he said.
There's a lot of potentially deductible expenses but if you cannot hunt down records for every little last cost, don't worry, McDowell said. Just get as much as you can -- and besides, the biggest costs, like assisted-living facility invoices should be easy to obtain.
I don't know how your relative is paying for all the costs and incidental expenses.
But if she's dipping into an IRA to defray costs -- a common move McDowell sees -- there may be added pitfalls making the deduction even more necessary.
Without getting into the thicket of rules and exceptions on early IRA withdrawals and required minimum distributions, using the IRA is likely going to be a taxable event leading to a higher tax bill. The medical expense deduction is there to counteract the higher income-tax bill, McDowell said.
"It's such an important balance. If you don't do it, people can be a world of trouble from a tax perspective."
Hope that helps, and again, a full and speedy recovery to your relative.
Got a tax question? Write me at: firstname.lastname@example.org
Thanks for reading. I want to help you think more broadly about the issues that affect your taxes. I'm not offering tax advice, just an attempt to look at what the swirl of tax rules and economic conditions could mean for your wallet.
I'm here for the reader who faces their taxes with an air of resignation. You're just not that into taxes, I get it. I was once that guy. Underneath the jargon, think of your taxes like a maze -- with money at the end. Or a trap that you need to avoid.
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11-29-22 1344ETCopyright (c) 2022 Dow Jones & Company, Inc.