Joining a Continuing Care Retirement Community can be a bit complicated, but often includes significant tax advantages. The tax benefits differ considerably depending on which type of contract you agree to. You’re advised to consult an attorney or personal financial advisor who specialize in retirement planning before you sign any contracts.
In all cases, you are limited to deducting only qualifying medical expenses that are greater than $7500 or 7.5% of your adjusted gross income for the year.
This guide describes the tax benefits associated with the different types of contracts.
Life Care Contracts (Extended Contracts)
With this type of contract, you have peace of mind knowing that the costs of any additional health care that is needed as you age will be covered. The entrance fee and the monthly payments agreed to will cover the costs of your health care for life.
Since the payment of this entrance fee will provide for health care as needed, the IRS considers the portion of the fee that is projected to go towards health care costs as being tax deductible. The amount of the initial fee that can be deducted ranges from between 30% and 40%.
The statement of operating costs of a particular CCRC can provide the breakdown for what percentage of the fee is projected to go towards healthcare costs. This portion is considered a qualifying medical expense.
If you change your mind about living in a CCRC, a portion of your entrance fee is refundable in many cases. If you decide to leave, or your heirs recieve a portion of the fee refunded to them as a result of your passing, only the portion that is not returned to you or your estate can be deducted.
The same logic applies to the portion of the monthly fees that are projected to go towards health care. If there are enough health care expenses to meet the qualifications for taking a medical deduction ($7500 or more for the year), this portion is also tax deductible.
Modified contracts
With modified contracts, if you need advanced health care for more than a few months, you will pay a higher monthly fee for this care than you would under an extended life-care contract. Generally, the entrance fee is refundable under a modified contract. Since this is the case, you cannot deduct a portion of your entrance fee as healthcare costs. However, your monthly fees will be paying for advanced care should you need it. The portion of these fees that go towards healthcare is tax-deductable, provided that the expenses are more than $7500 for the year.
Fee for Service Contracts
The benefit of this type of contract is that it may enable your spouse to get advanced care while you are living independently, and generally won’t require much in the way of up-front fees. However, monthly fees vary based on the level of care you or your spouse need. With a fee-for-service contract, if you or your spouse needs assisted living or skilled nursing care, you will pay the prevailing market rate.
With a fee-for-service contract, when fees for medical care are incurred, you can deduct the portion of your monthly fees that are going towards health care expenses, provided you meet the guidelines for making such deductions by spending more than $7500 or 7.5% of your adjusted yearly income.