According to reports, nearly 1.5 million Americans are living in nursing homes. This is a big number, even if it represents just half of a percent of our population, so it’s difficult to imagine—until it becomes a reality for your family.
If you have a parent moving into a nursing home or long-term healthcare facility, there are so many logistics to consider, plus the emotional aspects, and you’re probably not thinking about the tax implications of the situation.
It’s important to do so, however, so here are five tax-related points for you to ponder as you navigate the transition to a nursing home for your parents.
Five tax implications of nursing homes
1. Long-term medical care costs
Expenses incurred for qualified long-term care, including nursing home care, are counted as deductible medical expenses to the extent that they, along with any other medical costs, exceed 7.5% of adjusted gross income (AGI).
Treatments that are eligible as qualified long-term care services are:
- Diagnostic
- Preventative
- Therapeutic
- Curing
- Mitigating
- Rehabilitative
- Maintenance or personal care for chronically ill patients
To qualify as chronically ill, a physician or other licensed healthcare practitioner must certify a patient as unable to perform at least two daily living activities for 90 days due to a loss of functional capacity or severe cognitive impairment.
. These activities include:
- Eating
- Toileting
- Transferring
- Bathing
- Dressing
- Continence
2. Nursing home payments
Payments made to a nursing home are deductible as medical expenses if the person staying at the facility is there primarily for medical care rather than custodial care. If a person isn’t staying in the nursing home primarily for medical care, only the portion of the fee that’s related to actual medical care is eligible for a deduction.
However, if the person is chronically ill, all qualified long-term care services, including maintenance or personal care services, are deductible.
If your parent qualifies as a dependent, you may include any medical costs you incur for your parent along with your own when determining the amount of your medical deduction.
3. Long-term care insurance
The premiums you pay for a qualified long-term care insurance contract can be deducted as medical expenses if they, together with other medical expenses, exceed the percentage-of-AGI threshold. However, they are subject to limitations.
The qualified long-term care insurance contract only covers qualified long-term care services and doesn't pay costs covered by Medicare, is guaranteed renewable, and doesn't have a cash surrender value.
You may include qualified long-term care premiums as medical expenses up to specific amounts:
- For individuals over 60 but not over 70 years old, the 2023 limit on deductible long-term care insurance premiums is $4,770
- For those over 70, the 2023 limit is $5,960.
4. The sale of your parents’ property
If your parent sells their primary residence, up to $250,000 of the gain from the sale may be tax-free. To qualify for the $250,000 exclusion ($500,000 if married), the seller must have used and owned the home for at least two years out of five years before the sale.
There is an exception to the two-out-of-five-year use test, which is if the seller becomes mentally or physically unable to care for themselves during the five-year period.
5. Head-of-household filing status
Provided you aren’t married and meet certain dependency tests for your parents, you might be qualified for head-of-household filing status, which comes with a higher standard deduction and lower tax rates than single filing status.
You may be eligible to file as head of household even if the parent you’re claiming as an exemption doesn’t live with you.
Have questions? Smolin can help
These are just a few of the tax issues you might need to deal with if your parents move into a nursing home. If you’re looking for other ways to improve your tax situation and make things easier during this transition, contact the team at Smolin, and we’ll help you navigate the ins and outs of long-term healthcare tax breaks.