The skyrocketing costs of long-term care (LTC) can ruin your retirement savings. The U.S. Department of Health and Human Services found that 27% of Americans turning 65 this year will have at least $100,000 in long-term-care costs, and 18% will require care costing more than $250,000.
Kiplinger’s recent article entitled “Deduct Expenses for Long-Term Care on Your Tax Return” says that if you need LTC, you may be able to deduct a portion of the costs on your tax return. If you purchased a long-term-care insurance (LTCI) policy to cover the costs, you may also be able to deduct some of your premium payments. Since retirement planning includes long-term care, it’s important to know how these tax deductions can help to offset overall costs.
The IRS allows you to deduct unreimbursed costs for long-term care as a medical expense, if certain requirements are met. This includes eligible expenses for in-home, assisted living and nursing-home services. The long-term care must be medically necessary and may include preventive, therapeutic, treating, rehabilitative, personal care, or other services. The cost of meals and lodging at an assisted-living facility or nursing home is also included, if the primary reason for being there is to receive qualified medical care.
The care must also be for a chronically ill person and provided under a care plan prescribed by a doctor. The IRS says that a person is “chronically ill,” if he or she can’t perform at least two activities of daily living. These are things like eating, bathing, or dressing. They must be unable to do these without help for at least 90 days. This condition must be certified in writing within the last year. A person with a severe cognitive impairment, like dementia, is also considered chronically ill, if supervision is needed to protect his or her health and safety.
To get the deduction, you have to itemize deductions on your tax return. However, itemized deductions for medical expenses are only allowed to the extent they exceed 7.5% of your adjusted gross income.
An adult child can claim a medical expense deduction on his own tax return for the cost of a parent’s care, if he can claim the parent as a dependent.
The IRS also allows a limited deduction for certain LTCI premiums. Similar to the deduction for long-term-care services, this has to be an itemized deduction for medical expenses. Again, only premiums exceeding the 7.5% of AGI threshold are deductible. (Note that self-employed individuals may be able to deduct premiums paid for LTCI as an adjustment to income without having to itemize.)
In addition, the LTCI policy is required to satisfy certain requirements for the premiums to be deductible. The policy can only cover long-term-care services, so the deduction only applies to traditional LTCI policies, not “hybrid” policies that combine life insurance with long-term-care benefits. This deduction also has an age-related cap. For 2021, the cap is $5,640 if you’re older than 70, $4,520 if you’re 61 to 70 and $1,690 if you’re 51 to 60. (For those 41 to 50, it’s $850, and for 40 or younger, it’s $450.)
These deductions can be valuable for people in their seventies and older.
Reference: Kiplinger (March 23, 2021) “Deduct Expenses for Long-Term Care on Your Tax Return”