Health care or long-term care can eat up a big part of a retiree’s budget – or the budget of a retiree’s children. Fortunately, the tax law can help pay for a big part of that burden.
Deductions for medical expenses seemed to disappear when the rules were changed in 1986. Now, you can deduct medical expenses only if you itemize deductions. Even then, you deduct only the medical expenses that exceed 7.5% of adjusted gross income. For example, if your adjusted gross income is $50,000, you deduct only those medical expenses that exceed $3,750.
But if you know the tax rules and how to structure your affairs, you can get big tax deductions for your medical expenses. Here are some examples of how to get the most medical expense deductions.
- Suppose Rosie Profits is in a nursing home at a cost of $60,000 annually. Rosie has income from Social Security and investments that cover most of the cost, and the rest is paid from selling investments. Deducting the cost as a medical expense wipes out her tax bill.But what if Rosie’s adult son, Hi, is in a higher tax bracket? The medical expense deduction is much more valuable in the higher tax bracket. Adding the nursing home expense to the other medical expenses of Hi’s family could make those expenses deductible. Then, the best solution is for Hi to pay Rosie’s nursing home expenses.
Here’s how the numbers could work. Suppose Hi’s adjusted gross income is $250,000. He needs medical expenses more than $18,750 to deduct anything. If Hi pays all Rosie’s nursing home expenses, he’ll deduct $41,250. Plus, Hi’s other medical expenses might now be deductible. The medical expense deduction reduces Hi’s taxes by more than $16,000. Rosie could give Hi $44,000 annually to pay the nursing home expenses and still leave him whole. Rosie now would have a tax bill of over $8,000 annually, leaving the family net savings of around $8,000 by restructuring in this way. Rosie will need to file a gift tax return, but there shouldn’t be a gift tax unless her lifetime estate and gift tax exemption already is used.
You can deduct another relative’s medical expenses on your tax return if you provided over half that person’s support during the year. IRS Publication 502 Medical and Dental Expenses lists the relatives that qualify and the expenses that count as support. (Call 800-TAX-FORM or check www.irs.gov.) If that relative also has non-Social Security income less than the personal exemption amount, you might also get a dependent exemption. Check IRS Publication 17 for details on the dependent exemption.
Suppose all of Rosie’s children contribute to her nursing home expenses. To ensure that someone gets the medical expense deduction, they should all make tax-free gifts of up to $10,000 to one sibling who pays the expenses and takes the deduction. The amount they all contribute should take the tax deduction into account.
- Knowing the rules also can maximize the nursing home expenses that are deductible. When one resides in a nursing home because of his or her physical condition and the availability of medical care is the primary reason for residing there, the entire cost of the nursing home is deductible. But if medical care is not the primary reason for residing in the nursing home, only the costs attributable to medical or nursing care are deductible. Payments for food, lodging, and other personal expenses are not deductible in that case. Most nursing homes give itemized bills for their services. You should request one if it is not given.Deducting the cost of an assisted living facility is trickier. Deductions are most limited for those who can perform at least five of the six activities of daily living (eating, toileting, transferring, bathing, dressing, and continence). These individuals get deductions only for the portion of the costs related to nursing care or other health care. These should be itemized in the bill.
But when the assisted living resident cannot perform two or more of the activities of daily living, the entire cost of the facility can be deducted if the resident also has a plan of care in place. A plan of care can be drawn up by your physician, a nurse, or a physical therapist.
- Home health care expenses also might be deductible. Naturally, direct medical expenses can be deducted. These include medical care – including simple tasks such as blood pressure monitoring – performed by a licensed health care worker. But those who require home health care often require help with personal tasks such as meals, bathing, dressing, and bed-changing. The cost of this help might also be deductible if you are unable to perform two or more of the six activities of daily living and you have a plan of care that specifies help with these tasks. Check IRS Publication 502 for details.
- Sometimes a medical expense can be deducted twice. Suppose you purchase a medical device such as a wheelchair or crutches. That is deductible as a medical expense. Then you recover or your needs change. You can contribute that medical device to a charity and deduct the fair market value of the item as a charitable contribution.
- In recent years the IRS eased deductions for some expenses that previously weren’t deductible. The cost of smoking cessation programs whether or not prescribed by a doctor and the cost of prescription drugs to alleviate the symptoms of nicotine withdrawal are deductible (Rev. Rul. 99-28). A weight loss program also might be deductible if it is prescribed by a physician to treat a specific illness or ailment, though it is not deductible when undertaken to improve general health.
By restructuring some activities and knowing the rules, you might be able to greatly increase deductions from medical expenses. There can be a lot of money at stake. So be sure to read the IRS Publications mentioned here and also consult with a tax advisor. It is worth buying a few hours of an advisor’s time to make sure things are done correctly.