ASSISTED LIVING – THE TAX ISSUES 

Can I deduct the cost of assisted living as a medical expense?  If I pay my mother’s assisted living expenses, can I claim her as a dependent?  If so, can I deduct the cost of her assisted living expenses on my tax return?   

Before 1997, the answer to each of these questions was a resounding, “it depends.”  The cost of nursing homes or continuing care facilities was deductible if the patient’s primary reason for being there was for medical care rendered by physicians, licensed nurses or trained therapists.  But what about people who suffer from dementia, Alzheimer’s Disease, Parkinson’s Disease, or other chronic, progressive diseases?  These people may not need a nursing home but require long-term care that can be found in, for example, an assisted living facility.  These expenses had long been considered nondeductible.   

Enter the Health Insurance Portability and Accountability Act of 1996.  Effective January 1, 1997, the Act declared that long-term care expenses are deductible as a medical expense, and that the deductibility of long-term care expenses is determined by the degree of incapacity of the patient, not the facility in which he or she resides.  In other words, a patient with Parkinson’s can live in an assisted living facility and potentially deduct the entire cost as a medical expense.  

It should be noted that all medical expenses need to be in excess of 7 1&Mac218;2 % of a taxpayer’s adjusted gross income to be deductible as an itemized deduction.  In addition, a taxpayer must have itemized deductions in excess of their standard deduction to take advantage of their medical expenses.  A taxpayer’s standard deduction is determined by their filing status, i.e., single, married filing jointly, married filing separately, or head of household.   

What are long-term care expenses?  Section 7702 of the Internal Revenue Code defines long-term care services as: 

“Necessary diagnostic, prevent, therapeutic, curing, treating, mitigating and  rehabilitative services, and maintenance or personal care services which: a) are required by a chronically ill individual, and b) are provided pursuant to a plan of care prescribed by a licensed health care practitioner.” 

A chronically ill individual is a person who has been certified within the previous 12 months by a licensed health care practitioner as a) being unable to perform, without substantial assistance, at least two activities of daily living (ADL), and b) requiring substantial supervision to protect the individual from threats to health and safety due to severe cognitive impairment. 

There are six ADLs:

1)      Eating

2)      Toileting

3)      Transferring

4)      Bathing

5)      Dressing

6)      Continence 

Therefore, under the Act, a person who lives in an assisted living facility, and needs and receives assistance eating and bathing, for example, can deduct the entire cost of the facility as a medical expense.   The same is true for a person with Alzheimer’s Disease.   

A parent may be claimed as a dependent if the following applies: 

1)      The child provides more than 50% of the parent’s support

2)      The parent must not have gross income in excess of the exemption amount ($3,000 in 2002)

3)      The parent must not file a joint return

4)      The parent must be a U.S. citizen or a resident of the U.S., Canada, or Mexico. 

As long as the above requirements are met, the parent does not have to live with the child to qualify as a dependent.  Qualified long-term care expenses counts as support.  If the support test can be met by more than one person (siblings for example) a multiple support agreement can be filed with the Internal Revenue Service.  The person receiving the exemption must have provided at least 10% of the support. 

An unmarried child can file as a head of household if he or she is entitled to claim a dependency exemption for their parent.  Filing as a head of household is more favorable than filing as a single taxpayer.  Generally, to qualify as head of household, one must have paid more than half the cost of maintaining a home for themselves and a qualifying relative for more than half the year.  However, when a parent is the qualifying relative, the child must pay more than half the cost of maintaining a home that was the principal home for the parent for the entire year.  Therefore, if a child pays for more than half the cost of an assisted living facility for their parent, it is considered maintaining a principal home.   

If a parent qualifies as a dependent as discussed above, a child can add any medical expenses incurred for their parent to their own when determining a medical expense deduction.    

In conclusion, The Health Insurance Portability and Accountability Act of 1996 made significant changes for taxpayers incurring long-term care expenses in non-traditional healthcare facilities.  It is incumbent upon the taxpayer and their families to be aware of these changes and to benefit from them.

Joel M. Sachs

Certified Public Accountant

Certified Senior Advisor

Konowitz Kahn & Company, P.C.
 
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