Deducting the Cost of Life in a Retirement Community

Many Sarasota and Manatee County Florida residents in our aging population are transitioning from home ownership to living in a "continuing care retirement community" ("CCRC"). To enter a Sarasota or Manatee County Florida CCRC, an individual will pay a one-time entry fee and then ongoing monthly charges for housing and services (meal plans, housekeeping, transportation, and social and recreational activities). The benefit of a Sarasota or Manatee County Florida CCRC is that when a resident's health and personal care needs become more acute, they are not forced to move to a new facility as their level of service can be increased to include assisted living, long-term care and skilled nursing care. Although the costs of a CCRC can be substantial, a percentage of the costs can be deducted as a medical expense income tax deduction either by the individual or third party (if they are providing more than half of the resident's support).

Section 213(a) of the Internal Revenue Code allows as a deduction any expenses that are paid during the taxable year for the medical care of the Sarasota or Manatee County Florida resident, his spouse, and dependents and that are not compensated for by insurance or otherwise. Estate of Smith v. Commissioner, 79 T.C. 313, 318 (1982) [enhanced version available to lexis.com subscribers]. The deduction is allowed only to the extent the amount exceeds 7.5 percent of adjusted gross income. Sec. 213(a); sec. 1.213-1(a)(3), Income Tax Regs. For purposes of Sec. 213 the term "medical care" includes amounts paid "for the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body".

Support for the medical expense deduction is derived from the 2004 U.S. Tax Court decision of Delbert L. Baker v. Commissioner, 122 TC 143, 2004 [enhanced version available to lexis.com subscribers]. In Baker the taxpayers resided in an upscale California CCRC. On their income tax returns, the Bakers claimed medical expense deductions equal to about 27% of their first-year entry fee and about 40% of their monthly fees. The IRS denied a large percentage of the Baker's claimed deductions, and the couple took the case to the Tax Court and mostly won (losing only with respect to their attempt to claim medical deductions for expenses allocable to the CCRC's swimming pool, spa, and gym).  The Tax Court ruled that the amount of CCRC fees that can be treated as medical expenses for tax purposes depends only upon the CCRC's aggregate medical expenditures in relation to its overall expenditures or overall revenue from fees paid by its residents. 

Types of CCRC's and Calculation of Medical Expense Deduction

There are three basic types of CCRCs, each categorized by the amount of healthcare covered in the resident agreement and how and when the resident pays for the healthcare. The categories are: Type A (extensive contract), Type B (modified contract), and Types C and D (fee-for-service contracts). The cash outflows associated with these options are entrance fees and monthly fees. The category of the facility will affect the tax consequences for the resident.

The medical expense deduction can be calculated by the percentage method or the actuarial method. While the IRS supports use of the actuarial method based on healthcare utilization and longevity, the Tax Court in D.L. Baker v. Comm'r , 122 TC 143 (2004) [enhanced version available to lexis.com subscribers], upheld the use of the percentage method calculated on an allocation percentage based on the number of community residents and the weighted-average monthly service fees. The CCRC is responsible for determining the amount of the entrance fee and the monthly fee that should be allocated to prepaid healthcare. 

The deductibility of Sarasota and Manatee County Florida assisted-living monthly fees requires reference to IRC Section 7702B(c) and Notice 97-31 and definition of the term "chronically ill." This definition is crucial to the deductibility of the monthly fees because certain tax deductions that exist if the taxpayer enters assisted living as a chronically ill individual do not exist if the taxpayer enters for basic custodial care. To qualify as chronically ill, a Sarasota or Manatee County Florida resident must be certified by a licensed healthcare provider as unable to perform (without substantial assistance) at least two "activities of daily living" (eating, toileting, transferring, bathing, dressing, and continence) for at least 90 days due to a loss of functional capacity, or must require substantial supervision for protection due to severe cognitive impairment.

Additional Tax-Planning Opportunities

A Sarasota and Manatee County Florida resident who is planning their transition to a CCRC can obtain additional tax planning benefits by timing the payment of their entrance fee and liquidation of their investments to pay the fee. A combination of the tax-deductible portion of the entrance fee and monthly fees attributable to healthcare may result in significant itemized deductions. The deductions may reduce the individual's taxable income to a level that will result in their capital gains and qualifying dividends being taxed at the lower rate (5% instead of 15%).

View more information from Marc J. Soss at http://www.fl-estateplanning.com/ and http://info.fl-estateplanning.com/

Marc Soss' practice focuses on estate and tax planning; probate and trust administration and litigation; guardianship law; and corporate law in Southwest Florida.  Marc is a frequent contributor to LISI and has published articles and been quoted in the Florida Bar, Rhode Island Bar, North Carolina Bar, Association of the United States Navy, Lawyers USA, Military.Com, Forbes.Com, and CNN Business. Marc also serves as an officer in the United States Naval Reserve.

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