When clients seek out our advice on preserving assets while being able to pay for long term care, we spend much time discussing government benefits such as Medicaid and the VA Aid and Attendance programs and ways to qualify for them. There is, however, another important aspect to consider. When using your own funds to pay for care, there are some assets that are better than others to spend on care – which can stretch out a nest egg.
That’s because of the issue of income taxes. At an average cost of $150,000 or more per year for nursing home level care most of our clients do not have enough income to cover the entire cost. Most need to liquidate different accounts and investments to meet this expense. This of course can have significant income tax implications if stocks, annuities or retirement accounts are being liquidated.
First, let’s run through some basic income tax concepts. When calculating income taxes, certain deductions are permitted to be taken against income before calculating the tax owed. Many people take a standard deduction but sometimes it is beneficial to itemize the deductions if they turn out to be greater than the amount of the standard deduction. Certain unreimbursed medical expenses are one category that can result in a much bigger deduction than the standard deduction.
Specifically, the IRS defines a medical expense to include the cost of medical care in a nursing home, home for the aged, or similar institution. This can include a licensed assisted living facility. For the expense to be deductible, the resident must be considered chronically ill. This is defined as either needing assistance with at least two of the activities of daily living (walking, bathing, dressing, toileting, eating and incontinence) or requiring supervision because of a cognitive impairment (eg. Alzheimer’s Disease, dementia, Parkinson’s Disease). The key is whether the individual is residing in the facility because of the need for care. If so, then the room and board and all personal care expenses are deductible.
This can have a huge impact when it comes to liquidating asset to pay for care. I’ll explain exactly how next week.