When You Can Take Tax Breaks for Long-Term Care Expenses

Long-term care costs you less when all or part of the expenses are tax deductible. Know the rules about deducting long-term care (LTC) expenses and your out-of-pocket cost of providing care for yourself or family members could be reduced.

LTC expenses are tax deductible only when they aren’t reimbursed by insurance or other sources. To the extent insurance covers expenses, they won’t be deductible. In addition, to be deductible, LTC expenses must qualify as medical expenses.

Personal or non-medical expenses aren’t deductible. When long-term care is provided, a person usually is receiving a combination of medical services and personal care services. The services might be provided in a nursing home, assisted living residence or at home by visiting providers. In all those cases, the tax rules are the same.

The person might be administered medication, have vital signs or other conditions checked, and perhaps receive physical therapy or other services. Those are medical services. The person also is likely to receive room and board. Often assistance is provided with personal care, such as bathing, dressing, eating, and moving around.

These are personal services. Generally, deductible medical care is care provided for the diagnosis, treatment, prevention, or mitigation of a disease. Rehabilitative services also are deductible medical expenses. But personal services provided to a chronically ill individual qualify as deductible medical expenses when certain conditions are met.

The person must be certified by a licensed medical professional as either being unable to perform without assistance at least two of the six activities of daily living (eating, toileting, transfer- ring, bathing, dressing, or continence) or require supervision due to cognitive impairment.

In addition, the personal care services must be provided under a written plan developed by a licensed health care provider. Often a person is in a nursing home primarily because of medical conditions or the need for medical treatment. In those cases, the full cost of the nursing home is deductible.

But if medical care is not the primary reason for residing in the nursing home, only the specific costs attributable to medical or nursing care are deductible. Payments for food, lodging, and other personal expenses are not deductible. This will be the case when the resident needs primarily what’s referred to as custodial care.

Unlike a nursing home (also known as a skilled nursing facility), an assisted living residence is a residential facility, not a medical facility. Fewer of the assisted living expenses are likely to be deductible for most residents. For most of the assisted living residence costs to be deductible, it must be shown that the individual is in the residence primarily for medical care and under a certified care plan.

But when custodial care is the primary reason for being in assisted living, only the specific medical costs are deductible. Room, board and other personal care expenses aren’t deductible.

Determining the difference between the medical and personal care can be difficult, because a person only is receiving long-term care when he or she has physical or cognitive issues. Suppose the person needs help with eating, dressing, moving around, and the like. This assistance is custodial care, not medical care.

But when the person needs regular treatments or monitoring that can be provided only by a licensed medical professional, such as a doctor or registered nurse, then the primary reason for being in the residence likely is medical. Also, when the person has chronic medical problems that require the personal care assistance, that assistance might qualify as medical care.

A nursing home or assisted living residence usually itemizes bills so that you can see which expenses are for medical care and which are for personal care. When the care is provided at home, either at the home of the patient or the caregiver, the rules are the same.

The care must be provided primarily for medical reasons to be deductible. In one court case, a patient was chronically ill due to dementia and her doctor believed caregivers were necessary around the clock for medical reasons, as well as safety.

People were hired to be at the patient’s home 24 hours a day and provide whatever care she needed. Because the patient had a plan of care in place and her doctor believed the caregivers were necessary because of her diminished capacity, the Tax Court held that the payments to the caregivers were deductible as medical expenses. (Estate of Lillian Baral, 137 T.C. No. 1, 2011)

When care is deductible, it can be deductible even when it is provided by a relative. When a relative provides the care, there must be a written agreement describing the care that will be provided and the compensation for it.

The pay must be reasonable for the care provided, and the person paid must be qualified to give the care. Without a written agreement spelling out the details, the IRS will assume that a relative providing care is doing so without expectation of payment. (Estate of Olivo v. Commissioner, T.C. Memo. 2011-163)

When family members are involved in giving or paying for the care, the arrangements can be structured so that someone is able to deduct qualified medical expenses. In the April 2021 issue, I discussed situations in which you can deduct medical expenses paid for relatives and others.

Here’s another example of how tax deductions could be salvaged. A daughter had significant medical expenses, which her mother paid. The daughter was an adult and not the mother’s dependent, so the mother couldn’t deduct the expenses. The daughter deducted them, and the Tax Court allowed the deduction.

The payments were intended as gifts to the daughter, so she was entitled to the deductions as though she received cash gifts from her mother and paid the expenses herself. (Lang v. Commissioner, T.C. Memo 2010-286)

Remember that medical expenses are deductible only for taxpayers who itemize expenses on Schedule A and only to the extent the medical expenses exceed 7.5% of adjusted gross income. Adult day care is another form of LTC. This is not medical care, but different tax breaks might be available when the person going to day care is the dependent of another taxpayer.

When the taxpayer supporting the dependent is employed, a flexible spending account that reimburses dependent care might be available. The account allows an employee to allocate a portion of salary to the FSA, which then can be used to reimburse, tax free, qualified dependent care expenses. Check with your employer to see if this option is available and what the requirements are.

When an FSA isn’t available, a working taxpayer who is paying for the day care might be able to claim the dependent care tax credit. The expenses must be necessary to allow the taxpayer (and a spouse, if married) to work. See IRS Publication 503 for details about qualifying for the credit. It’s available free at www.irs.gov.