When experts share the benefits of a Life Plan Community, they usually spotlight three key elements. The first benefit is the social interaction and companionship of living in a community. Studies show that seniors residing within a community live seven years longer, often with fewer health concerns caused by isolation. Second, the continuum of care provides for a resident’s future care, giving peace of mind to family members. It removes the burden of caretaking from loved ones during a health incident. Third, a not-for-profit Life Plan Community ensures financial predictability that is not dependent on the ever-changing market rate in senior living.
However, one area often ignored is the tax benefits of a Life Plan Community and a Life Care agreement. “Life Care” defines the financial arrangements of a predictable monthly fee under which certain services are provided. Even if you reside in an Independent Living neighborhood, the medical care and qualified long-term care services you receive can be eligible for tax deductions. But that’s not all. A portion of your entrance fee may also be considered a tax deduction.
Medical expenses and entrance fees can be deductions, if they exceed 7.5 percent of your Adjusted Gross Income (AGI), are on the allowable list of expenses provided by the IRS, and if you plan to itemize your deductions.
There are two efficient ways to determine the amount deducted for medical care and entrance fees: the Tax Court Method or the Percentage Method. The Tax Court calculates medical expenses using a weighted-average process, while the Percentage Method divides your community’s annual Health Services expenses by the total annual operating expenses.
As an example, Friendsview (like many Life Plan Communities) provides an annual letter with information on both calculations:
Independent Living Health Center Portion of Occupancy
Tax Court Method – $11,045 per resident, $22,090 per couple for the medical portion of fees paid to Friendsview in 2023 ($920 per person/$1,840 per couple, per month for residents that did not live at Friendsview for the entire calendar year).
Percentage Method – 32.1% of total fees paid in 2023 may be deductible by the resident. This amount should not include amounts paid for ancillary charges, such as meals, telephone charges, maintenance, laundry, etc.
Entrance Fees
Tax Court Method – $115,114 of the entrance fee paid in 2023 may be deductible by the Friendsview resident. This method can only be used if you paid a full entrance fee in 2023. If less than the full entrance fee was paid in 2023, the Percentage Method should be used.
Percentage Method – 32.1% of the entrance fee paid in 2023 to Friendsview may be deductible by the resident.
If a resident lives in an assisted living neighborhood and meets certain criteria, 100% of the resident’s fees would be deductible as a medical expense.
“However, tax laws include various complex rules and definitions; therefore, each person should consult their tax advisor regarding the proper application of these laws to their individual tax situation,” Roger Watson, CFO for Friendsview tells residents.
As we are not tax professionals, we cannot advise you on how to file your 2023 return. Here are three great questions that will help you decide if these tax benefits fit your situation:
- Did your medical expenses exceed 7.5% of your AGI?
- Is it more beneficial for you to use the standard deduction when filing your tax return or to itemize?
- What percentage of your entrance fee or monthly fees are considered medical care deductions according to the tax letter provided by your retirement community and current tax laws?
While some benefits to choosing a Life Plan Community may be obvious right up front (such as social capital, peace of mind, and financial predictability), others like the tax benefits are frequently forgotten. That’s why we encourage you to research your options for senior living and make a plan that fits your unique situation. If you want to know more about planning for retirement and the benefits associated with a Life Plan Community, please contact one of our Residency Planning Counselors today!
