Retirement community fees might be tax-deductible

Here’s some good news for people who live in – or are thinking of entering – a “continuing care retirement community.” These are communities for older people that provide an entire continuum of care, from independent living to nursing home, so that residents can “age in place” and not have to move elsewhere if their faculties start to diminish.

These communities are an appealing option, but they can be very expensive. The good news is that there is a tax break that could help defray the costs.

When moving into a community, residents typically sign a contract that includes a hefty entrance fee, which might or might not be refundable. Residents pay a monthly fee as well. Entry fees can run from $20,000 to more than $500,000, with monthly charges ranging from $200 to $3,500 or more. 

The tax break stems from the fact that if your medical expenses are more than 7.5 percent of your adjusted gross income (or 10 percent if you’re under age 65), you may be able to deduct some health care costs on your taxes.

Because continuing-care communities provide a full range of health services, when you enter a long-term contract with one, the IRS considers that part of your fee is a prepayment of future health care expenses. Therefore, it’s possible that you can deduct at least part of your entrance fee and your monthly fees.

The key is that it doesn’t matter how much health care you actually receive in a given year. The percentage of your fees that is considered a prepayment of health care expenses depends on the overall, aggregate percentage of the community’s expenses that goes toward health care. This percentage varies from community to community, but is often in the 30 to 40 percent range. (Your community should be able to provide you with its exact figure.)

The deduction generally works with regard to the entrance fee only if the fee is non-refundable. However, if the entrance fee is only partially non-refundable, you might be able to take a deduction based on the non-refundable portion.

You should also know that if children or other family members help a resident to pay the entrance fee or monthly expenses, they might also be eligible for the tax break.

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