Tax Breaks for Continuing-Care Retirement Communities
Paul F. Ciccarelli, CFP®, ChFC®, CLU®
For affluent seniors, a continuing-care retirement community (CCRC) can be an attractive alternative. These centers offer a full range of services, from independent living to skilled nursing. If you strolled through some of these CCRC campuses, you might think you were at a country club.
For those who could conceivably afford to live in a continuing-care retirement community, here’s a bit of good news: A little-known tax break could significantly lower your costs. Proper investment and tax planning can provide tremendous opportunities to enhance your future cash flow and financial positioning for the remainder of your lifetime.
The tax-saving idea here is that you may be able to deduct part of the CCRC’s one-time entrance fee and ongoing monthly fees as medical expenses. This is the case even if you currently live independently at the CCRC and require little to no care. In other words, you are allowed to claim a deduction for prepaid medical expenses, regardless of your current health status. Since the CCRC fees can be quite steep, significant write-offs may be allowed despite the 7.5% of adjusted gross income floor for deductible medical expenses.
The concept of prepaid medical deductions might sound too good to be true, but it is legitimate. For skeptical readers, consider the 2004 Tax Court decision, D.L. Baker v. Comm’r [122 TC 143, Dec. 55, 548 (2004)]. The Bakers decided to take their case to the Tax Court, which turned out to be a wise move – because they won big.
The Tax Court’s 2004 decision is good news for seniors because it confirms that you can treat a significant percentage of the one-time entry fees and recurring monthly charges as prepaid medical expenses. Even better, the amount that can be treated as medical expenses doesn’t in any way depend on the level of healthcare services you actually received during the year in question. They depend only on the CCRC’s aggregate medical expenditures in relation to overall expenses or revenue from fees paid by the residents. Any CCRC worth considering should have estimates of these percentages available for you to evaluate.
Because of the significant planning opportunities available to individuals moving into a CCRC, I strongly recommend that you seek advice from a qualified financial planner, a CPA or an attorney before making your final decision. Keep in mind that the deduction for the initial entrance fee and the ongoing monthly fees is a “use it or lose it” deduction. In other words, you will need to plan out your taxable income to ensure maximum benefit from these significant tax deductions.
