Tax deductibility of assisted living facilities

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Tax deductibility of assisted living facilities
By: Hyman G. Darling, Esq.

With the number of baby boomers growing, more people are electing to move to assisted living facilities as opposed to waiting until a long term care facility may be necessary. With the sale proceeds of the house being non-taxable in most cases due to the exemptions available, these funds may be placed into other investments, which will now produce income that was not generated by the house.

The payment to the assisted living facility (ALF) is mainly non-deductible, but in many cases, a portion of these expenses may in fact be deductible. This amount, which may be construed to be qualified long-term care costs, is deductible if it is for necessary rehabilitative services, maintenance or personal care services that are:

Required by the individual who is deemed to be chronically ill and
Paid pursuant to a plan of care by the licensed health care practitioner
While the rules are fairly specific, the IRS regulations that attempt to clarify the Internal Revenue Code for deductibility of these expenses are not as clear as one may wish. Maintenance or personal care services that provide assistance for an individual who is deemed to be chronically ill or disabled are normally deductible (subject to IRS limitations) if the individual needs require help with two activities of daily living (ADLs.) These ADLs include:

Feeding
Toileting
Transferring
Dressing
Bathing
Continence
Therefore, if a person is able to perform all of these duties and is merely obtaining custodial care at the assisted living facility, the payment or any part of it to the ALF will not be deductible. Similarly, if the facility is operated by a non-profit agency, the amount paid will also not be deductible as a charitable expense, since services are being provided for the payment, which is not considered a contribution.

If deductions are going to be taken, a test must be met, and it is also suggested that a qualified certified licensed care professional or practitioner provide a written plan that can be used as evidence in the event that the IRS questions the deductibility of certain payments. Although there is no definition set forth in the Internal Revenue Code for a plan of care, it is one of the best sources of establishing the credibility of the need for services.

Most ALFs also provide each resident, each year with a calculation of the costs of care that is deductible if all tests are met. Naturally, if there are any reimbursements made to the individual, these amounts must reduce the deductible expenses by the amount of payment received via governmental, private or otherwise. The facility normally provides these calculations on a year-to-year basis, which may change as various administrative and professional services change from year-to-year.

Naturally, if a person is disabled and living in a facility, with or without additional assistance, the full amount of care may be deductible if it is determined that this person must be institutionalized and is not any longer able to remain at home alone. It may also be a prudent decision to review the assets a person is utilizing for long-term care. If that person has a significantly large retirement plan, it may be beneficial to withdraw further funds from the plan, which may deductible as medical expenses, as opposed to merely withdrawing funds from a savings account. In this manner, retirement plan assets, although they will not continue to grow, will not be taxed by the beneficiaries at a significantly higher income tax rate, but rather, will allow other assets to pass income tax free to beneficiaries.