If you have a parent moving into a nursing home, the first thing on your mind might not be taxes. But there are some tax benefits you should consider. Here are five.
Nursing home expenses are qualified long-term care expenses and may be deductible
The costs of qualified long-term care can be deductible as medical expenses if, like other medical expenses, the costs of qualified long-term care exceed 7.5% of adjusted gross income (AGI). If total medical expenses do not exceed 7.5% of adjusted gross income (AGI), they are not deductible on your tax return.
Qualified long-term care services are defined as necessary diagnostic, preventive, therapeutic, curing, treating, mitigating and rehabilitative services, and maintenance or personal care services required by a “chronically ill” individual that is provided under the care of a licensed healthcare practitioner.
To qualify as “chronically ill”, a physician or other licensed healthcare practitioner must certify an individual as unable to perform 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 severe cognitive impairment.
Under these definitions, nursing home care is included in qualified long-term care and therefore, may be deducted on your tax return if total medical expenses are over the threshold of 7.5% AGI.
Long-term care insurance premiums may be deductible as a medical expense
Depending on the age of the insured person, up to $4,520 or $5,640 of qualified long-term care insurance premiums can be included as medical expenses. For individuals over 60, but younger than 70 years old, the 2021 limit on deductible long-term care insurance premiums is $4,520. For individuals older than 70 years, the 2021 limit is $5,640.
Premiums paid for a qualified long-term care insurance policy are deductible as medical expenses (subject to limitations based on age explained above) if, combined with other medical expenses, they exceed the 7.5% of the AGI threshold. A qualified long-term care insurance contract must meet these criteria: 1. covers only qualified long-term care services, 2. may pay for costs not covered by Medicare, 3. is a guaranteed renewable policy, and 4. has no cash surrender value.
Medical-related expenses paid to nursing homes may be deductible
Amounts paid to a nursing home are deductible as a medical expense if a person is staying at the facility primarily for medical reasons, rather than custodial care. If a person is not in the nursing home primarily to receive medical care, only the medical care portion of the nursing home expenses qualifies as a deductible expense. However, if the individual is diagnosed as chronically ill, all qualified long-term care services, including maintenance or personal care services, are included in medical expenses. Like other medical expenses, these expenses are only deductible if the total medical expenses for the year exceed 7.5% of adjusted gross income (AGI).
If your parent qualifies as your dependent, you can also include any medical expenses you incur for your parent along with your own when determining your total medical expense deductions. Combining both your and your dependent parent’s medical expenses just might push you over the 7.5% of adjusted gross income (AGI) threshold!
Head-of-household filing status can give you a higher standard deduction and lower tax rates
If you aren’t married and you meet certain dependency tests for your parent, you may qualify for the favorable head-of-household filing status that also allows a higher standard deduction and lower tax rates than the single filing status. You may also be eligible to file as head of household even if your parent does not live with you.
A portion of the gain from the sale of your parent’s home may be tax-free
If your parent (i.e., single or widowed) sells his or her home, up to $250,000 of the gain from the sale may be tax-free. To qualify for the $250,000 exclusion, the seller must generally have owned the home for at least two years out of the five years before the sale and used the home as their primary residence for at least two years out of the five years before the sale. However, an exception exists where if the seller becomes physically or mentally unable to care for him or herself during this five-year period. In that instance, the parent does not need to meet the two-out-of-five-year test to qualify for the home sale gain exclusion.
Having a parent move into a nursing home can be both stressful and expensive time. Hopefully, a few of these tax benefits can help mitigate the burden these expenses may cause on you or your loved ones. Please contact your Wegner CPAs tax advisor to discuss any further questions you may have on deducting retiree medical expenses.