An estimated 3.3 million Americans currently live in the nation’s nearly 16,000 nursing homes. That number translates to 1 in 7 people ages 65 and up, and more than 1 in 5 of them are 85 and older. Many pay their monthly fees with their own financial resources, and some have the assistance of long term care insurance. These fees can range from $2500 on the low end to more than $8000 a month for full time nursing home care. Additionally, nursing homes may require an initial entrance fee, which can range from $50,000 to several hundred thousand depending on the type of “home” one is buying into, and the level of care required at the start of residency.

Nursing homes require an enormous financial outlay. Many of us have questions about whether this can be considered a medical deduction on our 1040 tax return- and the answer is yes – but with clear guidelines. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) gave rise to the favorable tax provisions relating to long term care services as an incentive for individuals to take financial responsibility for their care needs. These incentives broadened the medical expense deduction on Schedule A to include unreimbursed expenses for long term care.

So what does this mean for me? It means that if you have long term care services that are necessary, diagnostic, preventive, therapeutic, curing, treating, mitigating, rehabilitative and are:

required by a chronically ill individual, and

provided pursuant to a plan of care by a licensed health care practitioner, usually a physician you are most likely eligible for the tax deduction.

The amount of this tax deduction depends on:

What you pay as an entrance fee

Your level of care. If you are not chronically ill, fees paid to retirement communities and assisted living facilities are deductible as medical expenses only to the extent they are attributable to medical care. This deduction also applies to entrance or initiation fees if a portion of the fee is attributable to providing medical services.

So how do I know what to deduct? A good question. Before you sign your initial contract with the assisted living or nursing home facility, you should be provided with information on the percentage of the initiation fee that is deductible as medical (for the first year only). You should also receive an estimate of what percentage of the monthly fee will be deductible this year. In January of the following year, the nursing home should also give you a “tax letter,” stating the percentage you can take for the year past as well as a copy of your annual billing statement to take to your income tax advisor.

For some assisted living residents, the entire monthly fee might be deductible. But for others, only the percentage allocated to medical care services would qualify for the deduction. Only out of pocket expenses (not those covered by long term care insurance) are deductible.

In addition to these costs, which can indeed be substantial, other deductible medical costs include: Medicare and supplemental insurance fees including long term care, drug costs and physician out of pocket expenses, hospital, dental and medical supply costs. Medical mileage can also be taken for the ill individual. All medical expenses can be deducted on your tax return on Schedule A if they are above 7 1/2% of your adjusted gross income. In many cases, this huge medical deduction allows you to itemize your deductions – and often wipes out much, if not all, of your income tax liability.

We recommend that you consult with your tax advisor with questions concerning your own personal circumstances prior to entering an assisted living or nursing facility and at tax time- to ensure you get all the deductions to which you may be entitled.