Americans who are not prepared for retirement are even less ready for the cost of long-term care. One government agency reports that almost a third of Americans celebrating their 65th birthday this year will incur at least $100,000 in long-term care costs. Fifteen percent will require care costing more than $250,000.
The numbers reported by the U.S. Department of Health and Human Services are scary to contemplate. The only good news is that costs of long-term care may be tax deductible, and a portion of premiums for long-term care insurance policies may be deductible as well. The cost of insurance is a far better buy than the cost of services, if you are considering whether or not to purchase a policy.
Kiplinger’s recent article, “Deduct Expenses for Long-Term Care on Your Tax Return,” explains that you can deduct unreimbursed costs for long-term care as a medical expense, including eligible expenses for in-home, assisted living and nursing-home services. However, certain requirements must be met. The long-term care must be medically necessary and can include preventive, therapeutic, treating, rehabilitative, personal care, or other services. The cost of meals and lodging at an assisted-living facility or nursing home is also included, if the main reason for being there is to get qualified medical care.
The care must also be for a chronically ill person and given under a care plan prescribed by a licensed health care practitioner. A person is “chronically ill,” if he or she can’t perform at least two activities of daily living—like eating, bathing or dressing—without help for at least 90 days. This condition must be certified in writing within the past year. A person with a severe cognitive impairment is also deemed to be chronically ill, if supervision is needed to protect his or her health and safety.
To claim the deduction, you must itemize deductions on your tax return. Itemized deductions for medical expenses are only allowed to the extent they exceed 10% of your adjusted gross income in 2019. An adult child can claim a medical expense deduction on his own tax return for the cost of a parent’s care, if he can claim the parent as a dependent.
The IRS also permits a limited deduction for certain long-term-care insurance premiums. You must submit an itemized deduction for medical expenses, and only premiums exceeding the 10% of AGI threshold are deductible in 2019. Further, the insurance policy itself must satisfy certain requirements for the premiums to be deductible. For instance, it can only cover long-term-care services. This limitation means the deduction only applies to traditional long-term-care policies, rather than hybrid policies that combine life insurance with long-term-care benefits. The deduction has an age-related cap.
While these deductions are not that useful for 50 or 60 year old people, they become more valuable over time. Income tends to drop in retirement, and deductions have a proportionately bigger impact on taxes. It is also true is that as people age, their medical expenses tend to increase, making it more likely that they will exceed the required 10% of AGI. IRS data shows that as many as two-thirds of all medical-expense decisions are made by seniors.
Reference: Kiplinger (September 4, 2019) “Deduct Expenses for Long-Term Care on Your Tax Return”