Is "buy in" to a CCRC deductible as a medical expense?

[FIREchief]

DW and I are (fortunately) many years away from this, but I want to consider it in long range financial planning. CCRC = continuing care retirement community for those unfamiliar.

https://en.wikipedia.org/wiki/Continuin ... ted_States

I asking about the life care contract scenario:

CCRCs offering Type A or life care contracts guarantee their residents shelter, residential services, and amenities along with personal assistance and nursing care for the rest of their lives in return for an initial entrance fee and a monthly payment schedule.

If a person has a large tIRA balance upon reaching an age requiring assisted living, can the initial entrance fee and monthly payments be withdrawn from the tIRA and deducted on schedule A as a qualified medical expense? I'm assuming current tax law. If so, are there any reasons not to plan for this? I see this strategy as possibly superior to LTCI (which I don't have) for those who have adequate assets. Thanks.

[fourwheelcycle]

In my experience, every CCRC sends out a letter before tax time each year which states the dollar amount of previous year entrance fees and monthly fees which are tax deductible as a medical expense. For our local CCRC the entrance fee dollar amount for 2019 was about 35% of the two person entrance fee we would have paid if we moved in last year. In fact, we probably won't move in for four to six more years.

As you know, only qualified medical expenses which exceed 7.5% of AGI are actually deductible, and the deduction comes after the $24.8K MFJ standard deduction has been "filled".

[One Ping]

In my experience, every CCRC sends out a letter before tax time each year which states the dollar amount of previous year entrance fees and monthly fees which are tax deductible as a medical expense.

This has been my experience with my parents CCRC.

[ResearchMed]

In my experience, every CCRC sends out a letter before tax time each year which states the dollar amount of previous year entrance fees and monthly fees which are tax deductible as a medical expense. For our local CCRC the entrance fee dollar amount for 2019 was about 35% of the two person entrance fee we would have paid if we moved in last year. In fact, we probably won't move in for four to six more years.

As you know, only qualified medical expenses which exceed 7.5% of AGI are actually deductible, and the deduction comes after the $24.8K MFJ standard deduction has been "filled".

Wow.... this never even occurred to me.
And we were quite annoyed that we'd probably need to take a very hefty withdrawal as we started at the facility we've selected.
Best I could think of was to split it into two years.

But if necessary, and it's all in one year due to timing issues, and if the total deductible amount exceeds taxable income (adjusted per above, etc.), can any "extra" be carried over to the next tax year?

Thanks.

RM

[fourwheelcycle]

But if necessary, and it's all in one year due to timing issues, and if the total deductible amount exceeds taxable income (adjusted per above, etc.), can any "extra" be carried over to the next tax year?

I think eligible medical expenses must be deducted for the tax year they were incurred, so if you can't use them all you lose them. If I'm wrong I'm sure someone will let us know!

[FIREchief]

Wow.... this never even occurred to me.
And we were quite annoyed that we'd probably need to take a very hefty withdrawal as we started at the facility we've selected.
Best I could think of was to split it into two years.

Are you referring to a withdrawal from a tIRA or some other type of account?

But if necessary, and it's all in one year due to timing issues, and if the total deductible amount exceeds taxable income (adjusted per above, etc.), can any "extra" be carried over to the next tax year?

In the OP, since I was referring to covering deductible entrance fees with a tIRA withdrawal, by default the deductible amount could not exceed taxable income (since anything withdrawn from the tIRA would be an increase to taxable income / we have no after-tax basis in our tIRAs).

[FIREchief]

In my experience, every CCRC sends out a letter before tax time each year which states the dollar amount of previous year entrance fees and monthly fees which are tax deductible as a medical expense. For our local CCRC the entrance fee dollar amount for 2019 was about 35% of the two person entrance fee we would have paid if we moved in last year. In fact, we probably won't move in for four to six more years.

As you know, only qualified medical expenses which exceed 7.5% of AGI are actually deductible, and the deduction comes after the $24.8K MFJ standard deduction has been "filled".

Thanks for the response. If I understand correctly, just using purely hypothetical numbers, if the entrance fee was $600K, then the portion of $210K that exceeds 7.5% of AGI would be deductible on schedule A. Is that correct?

[NotWhoYouThink]

That is correct for 2020. When TCJA passed the 7.5% was just for 2017 and 2018, then it was supposed to go up to 10%, but the 7.5% has been extended through 2020. No speculation for what happens in 2021 and beyond.

Also, a portion of the monthly fee can be considered a medical expense. At my mom's CCRC, that is about 20% of the monthly fee for the assisted living units, and higher in AL or SN.

[FIREchief]

That is correct for 2020. When TCJA passed the 7.5% was just for 2017 and 2018, then it was supposed to go up to 10%, but the 7.5% has been extended through 2020. No speculation for what happens in 2021 and beyond.

Also, a portion of the monthly fee can be considered a medical expense. At my mom's CCRC, that is about 20% of the monthly fee for the assisted living units, and higher in AL or SN.

Thanks. Is this because some of the fees are just considered to cover "room and board?"

[ResearchMed]

Wow.... this never even occurred to me.
And we were quite annoyed that we'd probably need to take a very hefty withdrawal as we started at the facility we've selected.
Best I could think of was to split it into two years.

Are you referring to a withdrawal from a tIRA or some other type of account?

But if necessary, and it's all in one year due to timing issues, and if the total deductible amount exceeds taxable income (adjusted per above, etc.), can any "extra" be carried over to the next tax year?

In the OP, since I was referring to covering deductible entrance fees with a tIRA withdrawal, by default the deductible amount could not exceed taxable income (since anything withdrawn from the tIRA would be an increase to taxable income / we have no after-tax basis in our tIRAs).

Why does it matter where the "taxable income" comes from? I didn't realize that if it's from salary, consulting, or IRA/403b withdrawals, it could be different in terms of whether something like this (medical expenses) could be deducted.
I wrote "...taxable income (adjusted per above, etc.),...".
[emphasis added]

Does the source of the taxable income really matter for this?
[In our case it may be tIRA withdrawals plus Social Security, or more likely, salary, tIRA withdrawals, and Social Security (with 85% taxed).]

Sorry; I didn't quite understand your last sentence, starting with "In the OP...", and I'm not sure how some of that relates to my question, so please explain a bit more.

Many thanks!

RM

[FIREchief]

In my experience, every CCRC sends out a letter before tax time each year which states the dollar amount of previous year entrance fees and monthly fees which are tax deductible as a medical expense.

This has been my experience with my parents CCRC.

Thanks. Have they been able to provide an estimated percentage before the end of the tax year? I'm envisioning a strategy of basing late December tIRA withdrawals (in excess of known RMD) on anticipated deductible medical expenses. Does that make sense?

[FIREchief]

Wow.... this never even occurred to me.
And we were quite annoyed that we'd probably need to take a very hefty withdrawal as we started at the facility we've selected.
Best I could think of was to split it into two years.

Are you referring to a withdrawal from a tIRA or some other type of account?

But if necessary, and it's all in one year due to timing issues, and if the total deductible amount exceeds taxable income (adjusted per above, etc.), can any "extra" be carried over to the next tax year?

In the OP, since I was referring to covering deductible entrance fees with a tIRA withdrawal, by default the deductible amount could not exceed taxable income (since anything withdrawn from the tIRA would be an increase to taxable income / we have no after-tax basis in our tIRAs).

Why does it matter where the "taxable income" comes from? I didn't realize that if it's from salary, consulting, or IRA/403b withdrawals, it could be different in terms of whether something like this (medical expenses) could be deducted.
I wrote "...taxable income (adjusted per above, etc.),...".
[emphasis added]

Does the source of the taxable income really matter for this?
[In our case it may be tIRA withdrawals plus Social Security, or more likely, salary, tIRA withdrawals, and Social Security (with 85% taxed).]

Sorry; I didn't quite understand your last sentence, starting with "In the OP...", and I'm not sure how some of that relates to my question, so please explain a bit more.

Many thanks!

RM

I understand your point. I was focused on tIRA withdrawals because in my case - and many cases - they generate 100% taxable ordinary income as opposed to after-tax equity sales (which would generate gains taxable at favorable capital gains rates) and Roth withdrawals (for which there would be no tax benefit). The backdrop of my question (which I didn't share and shouldn't really affect the general discussion) is long term planning for how much of our tIRAs to ultimately convert. If there is a likelihood of being able to withdraw some essentially tax free (per this thread), than there would be a sub-optimization of "over-converting" to Roth if a person was ultimately faced with expensive long term care. Expensive ordinary income taxes would be paid now which would essentially provide zero benefit (ROI) in the future. The only risk I see of underconverting is that we would never need long term care and "somebody" might pay higher taxes on an inherited tIRA. I think a Charitable Remainder Trust for the second to die spouse might be a good mitigating move, but that's another discussion and one I haven't gotten to yet. Hopefully that makes sense.

[One Ping]

In my experience, every CCRC sends out a letter before tax time each year which states the dollar amount of previous year entrance fees and monthly fees which are tax deductible as a medical expense.

This has been my experience with my parents CCRC.

Thanks. Have they been able to provide an estimated percentage before the end of the tax year? I'm envisioning a strategy of basing late December tIRA withdrawals (in excess of known RMD) on anticipated deductible medical expenses. Does that make sense?

I don't recall whether the notice came before the end of the year or after. I suspect it was after. I think your strategy could work even if you didn't learn the actual amount until after the end of the year by using what the previous year's amount was, as long as you didn't cut it too close.

[FIREchief]

In my experience, every CCRC sends out a letter before tax time each year which states the dollar amount of previous year entrance fees and monthly fees which are tax deductible as a medical expense.

This has been my experience with my parents CCRC.

Thanks. Have they been able to provide an estimated percentage before the end of the tax year? I'm envisioning a strategy of basing late December tIRA withdrawals (in excess of known RMD) on anticipated deductible medical expenses. Does that make sense?

I don't recall whether the notice came before the end of the year or after. I suspect it was after. I think your strategy could work even if you didn't learn the actual amount until after the end of the year by using what the previous year's amount was, as long as you didn't cut it too close.

Yes, I believe that you are correct. I'm still wrapping my head around this concept. As I mentioned, DW and I are years from CCRC (hopefully), but currently in the midst of aggressive Roth conversions. The SECURE act changed the equation and we're all still sorting out the various strategy changes that might be warranted.

[printer86]

How about using HSA funds? Could someone grow their HSA account up until the time they enter a CCRC and the use the funds from that account for CCRC expenses?

[plannerman]

It's typically not a percentage of the buy-in and monthly service fee--it's a number. Your buy-in and monthly fee are based on the size of the unit you select. The buy-in and monthly fees for a 900 sq ft apartment are much less than the buy-in and monthly fees for a 2,600 sq ft home, but the deductible medical expenses are the same. Here are the deductions for 2019 for our CCRC:

Single Occupant Buy-in $56,830 Monthly Fee $530
Double Occupancy Buy-in $112,685 Monthly Fee $1060

plannerman

[fourwheelcycle]

If I understand correctly, just using purely hypothetical numbers, if the entrance fee was $600K, then the portion of $210K that exceeds 7.5% of AGI would be deductible on schedule A. Is that correct?

Yes, that's correct. Thirty-five percent just happened to be the percentage I calculated for the entrance fee associated with the unit my wife and I are considering. Each CCRC maintains cost accounting records for their own facility that enable them to calculate and report the dollar amount of their fees that are eligible as tax deductible medical expenses. There is not one IRS-approved percentage that any facility can use.

Our local CCRC calculates the tax deductible dollar amounts by allocating their actual costs for eligible medical expenses to each resident based on the average age and sex demographic for all residents. They do the same for entrance fees, which they allocate to each one or two person entrance fee based on the average demographic for all new entrants. The theory is that every (age and sex-adjusted) resident or new entrant is equally likely to use the available medical services, like the nursing, assisted living, and memory care units. Residents and new entrants who pay higher or lower monthly rates or entrance fees for varying size units will presumably benefit from more or less residential space, but they will not receive more than the calculated average amount of medical services for their demographic.

Our local CCRC sent out their deductible expense letter in mid-January this year.

[FIREchief]

If I understand correctly, just using purely hypothetical numbers, if the entrance fee was $600K, then the portion of $210K that exceeds 7.5% of AGI would be deductible on schedule A. Is that correct?

Yes, that's correct. Thirty-five percent just happened to be the percentage I calculated for the entrance fee associated with the unit my wife and I are considering. Each CCRC maintains cost accounting records for their own facility that enable them to calculate and report the dollar amount of their fees that are eligible as tax deductible medical expenses. There is not one IRS-approved percentage that any facility can use.

Our local CCRC calculates the tax deductible dollar amounts by allocating their actual costs for eligible medical expenses to each resident based on the average age and sex demographic for all residents. They do the same for entrance fees, which they allocate to each one or two person entrance fee based on the average demographic for all new entrants. The theory is that every (age and sex-adjusted) resident or new entrant is equally likely to use the available medical services, like the nursing, assisted living, and memory care units. Residents and new entrants who pay higher or lower monthly rates or entrance fees for varying size units will presumably benefit from more or less residential space, but they will not receive more than the calculated average amount of medical services for their demographic.

Our local CCRC sent out their deductible expense letter in mid-January this year.

Thank you for the thorough explanation.

[FIREchief]

It's typically not a percentage of the buy-in and monthly service fee--it's a number. Your buy-in and monthly fee are based on the size of the unit you select. The buy-in and monthly fees for a 900 sq ft apartment are much less than the buy-in and monthly fees for a 2,600 sq ft home, but the deductible medical expenses are the same. Here are the deductions for 2019 for our CCRC:

Single Occupant Buy-in $56,830 Monthly Fee $530
Double Occupancy Buy-in $112,685 Monthly Fee $1060

plannerman

Thank you so much for providing those actual numbers!! Do those numbers remain constant as a person moves from independent living to assisted living to skilled nursing? Although obviously specific to one facility in one area, it's good to get some idea of the magnitude. Would you be able to share if these are in a high, medium or low cost of living area? I'm in a medium sized city in what would likely be considered a medium cost of living area.

I'll use your numbers as the basis for a simple example. Assuming DW and I will at some point after age 70 move into a double occupancy unit and live there for 15 years (just an example). If I understand correctly, I could project $303,485 in future CCRC deductible medical expenses. I could add to that 15 years worth of Medicare part B and D premiums, which in the absence of IRMAA would currently total $52,056 (our modest HSA will be consumed by that point). Ignoring for a moment the 7.5% of AGI reduction, it would argue for leaving at least $355K in a tIRA (vs. Roth converting) in order to take advantage of the essentially "tax free" withdrawal option. It would also reduce the marginal tax rate on our RMDs since the withdrawals would count towards the RMD but not count against taxable income. Does this make sense? Thanks.

[bayview]

^^^ WRT whether the deductible (medical) figure goes up when moving through the system, our mothers’ assisted living expenses are 100% deductible* (excluding beauty shop, excursions, etc.) due to the physician certification that their dementia makes it unsafe to live in other than this setting.

In other words, they are not ther by choice, as in the independent level of CCRC, but by medical necessity. This was also true of another ALF that was part of a CCRC.


* after the initial 7.5% or 10%

[FIREchief]

^^^ WRT whether the deductible (medical) figure goes up when moving through the system, our mothers’ assisted living expenses are 100% deductible* (excluding beauty shop, excursions, etc.) due to the physician certification that their dementia makes it unsafe to live in other than this setting.

In other words, they are not ther by choice, as in the independent level of CCRC, but by medical necessity. This was also true of another ALF that was part of a CCRC.


* after the initial 7.5% or 10%

Thanks. That's really good to know. You folks have provided a lot of good information to chew on.

[bayview]

^^^ WRT whether the deductible (medical) figure goes up when moving through the system, our mothers’ assisted living expenses are 100% deductible* (excluding beauty shop, excursions, etc.) due to the physician certification that their dementia makes it unsafe to live in other than this setting.

In other words, they are not ther by choice, as in the independent level of CCRC, but by medical necessity. This was also true of another ALF that was part of a CCRC.


* after the initial 7.5% or 10%

Thanks. That's really good to know. You folks have provided a lot of good information to chew on.

I should add that both ALFs included (sensibly) a note that this was NOT official IRS guidance and that one should consult with one’s tax professional, yada yada. But the individuals employed at each facility said that they had never heard about this being challenged on audits and so forth.

Every now and then you will come across this info in the Scary Articles about the high cost of LTC, but not often. Of course, it’s only relevant for those who do have enough income for this to be useful.

[FIREchief]

Every now and then you will come across this info in the Scary Articles about the high cost of LTC, but not often. Of course, it’s only relevant for those who do have enough income for this to be useful.

I'm just starting to learn about this stuff, but I like the concept of a CCRC much more than LTCi. Assuming one has the assets, I would much rather "save up" for being able to enter a viable CCRC than "invest" in LTCi with it's known limitations (on benefits) and lack of limitations (on rate increases). As I understand it, once one has met the criteria for a CCRC (entrance fees? minimum time in facility? etc?), there are essentially guaranteed to be able to stay there until end-of-life regardless of ability to further pay. Is his correct? If so, I like that much more than LTCi that might run out (picture ten - fifteen years dementia vs. just bad physical health) and leave someone on Medicaid.

[bayview]

Every now and then you will come across this info in the Scary Articles about the high cost of LTC, but not often. Of course, it’s only relevant for those who do have enough income for this to be useful.

I'm just starting to learn about this stuff, but I like the concept of a CCRC much more than LTCi. Assuming one has the assets, I would much rather "save up" for being able to enter a viable CCRC than "invest" in LTCi with it's known limitations (on benefits) and lack of limitations (on rate increases). As I understand it, once one has met the criteria for a CCRC (entrance fees? minimum time in facility? etc?), there are essentially guaranteed to be able to stay there until end-of-life regardless of ability to further pay. Is his correct? If so, I like that much more than LTCi that might run out (picture ten - fifteen years dementia vs. just bad physical health) and leave someone on Medicaid.

If you’ve got a lifetime contract (verbiage varies), they are pretty much stuck with you, with a few exceptions (danger to staff and other patients, etc.) Read carefully!

The big gamble is whether you will still meet the criteria for Independent Living at age 70+ or whatever you had planned! If you have enough risk factors, you might not qualify at that point, as they obviously are hoping that you won’t move to a higher level of care soon after joining. “Life is what happens when you’re making plans.”

A combination of this uncertainty plus DH and I deciding that the atmosphere of local CCRCs isn’t a good match for us (social/political views and our general flakiness ) made us decide to pay for in-home care as long as possible. Our house is well set up for aging in place on the first floor and even living quarters upstairs should we want to have live-in help. In the end, all this is a gamble, as I said.

[FIREchief]

Every now and then you will come across this info in the Scary Articles about the high cost of LTC, but not often. Of course, it’s only relevant for those who do have enough income for this to be useful.

I'm just starting to learn about this stuff, but I like the concept of a CCRC much more than LTCi. Assuming one has the assets, I would much rather "save up" for being able to enter a viable CCRC than "invest" in LTCi with it's known limitations (on benefits) and lack of limitations (on rate increases). As I understand it, once one has met the criteria for a CCRC (entrance fees? minimum time in facility? etc?), there are essentially guaranteed to be able to stay there until end-of-life regardless of ability to further pay. Is his correct? If so, I like that much more than LTCi that might run out (picture ten - fifteen years dementia vs. just bad physical health) and leave someone on Medicaid.

If you’ve got a lifetime contract (verbiage varies), they are pretty much stuck with you, with a few exceptions (danger to staff and other patients, etc.) Read carefully!

The big gamble is whether you will still meet the criteria for Independent Living at age 70+ or whatever you had planned! If you have enough risk factors, you might not qualify at that point, as they obviously are hoping that you won’t move to a higher level of care soon after joining. “Life is what happens when you’re making plans.”

A combination of this uncertainty plus DH and I deciding that the atmosphere of local CCRCs isn’t a good match for us (social/political views and our general flakiness ) made us decide to pay for in-home care as long as possible. Our house is well set up for aging in place on the first floor and even living quarters upstairs should we want to have live-in help. In the end, all this is a gamble, as I said.

Thanks. I’m just starting the education process on this stuff. Fortunately, we downsized from a 5 bedroom multi story house to a ground floor new construction apartment last year. Being new, it is compliant with all current codes, so retirement friendly. No stairs and wide doors and bathrooms, so likely wheelchair friendly. That said, we’ll also have good flexibility to move into a CCRC quickly should we decide to go that direction.

[fourwheelcycle]

Do those numbers {deductible medical expenses] remain constant as a person moves from independent living to assisted living to skilled nursing?

bayview wrote: WRT whether the deductible (medical) figure goes up when moving through the system, our mother's assisted living expenses are 100% deductible* (excluding beauty shop, excursions, etc.) due to the physician certification that their dementia makes it unsafe to live in other than this setting.

In other words, they are not there by choice, as in the independent level of CCRC, but by medical necessity.

FIREchief wrote: As I understand it, once one has met the criteria for a CCRC (entrance fees? minimum time in facility? etc?), there are essentially guaranteed to be able to stay there until end-of-life regardless of ability to further pay. Is his correct?

bayview wrote: If you’ve got a lifetime contract (verbiage varies), they are pretty much stuck with you.

These are all interesting and important issues.

If bayview had not offered their mother's experience I would have said for a Type A life care contract CCRC the amount of tax deductible medical expenses do not change as you move through the system since your monthly fee does not increase when you move to a higher level of care, even if your spouse remains in your independent living unit and as a couple you are now occupying two units for one monthly fee. Type B contract CCRC's typically have provisions that your first 90 days or so of nursing or memory care are free, but after that you do pay a higher fee, like $90 - $125K per year, while you spouse continues to pay a revised single occupancy fee for your independent living unit. I have never encountered a CCRC that operates with Type C fee for service contract, but this link suggests they exist: https://www.mylifesite.net/resources/ex ... contracts/

bayview notes their mother's physician certified she had to be in an assisted living level of care for medical safety reasons, so her bills are fully deductible. My father is currently in an assisted living facility based on a physician determination of need following an acute care hospitalization. When I did his taxes this year I considered whether he might be able to claim 100% of his ALF bills for this reason. I went to the IRS web site and ultimately concluded the IRS would not let him deduct the room and meals portion of his ALF bill, and I could only deduct his $400 per month "Level of Care" charge for management and supervision of his medications. However, back in 2006 - 2008 I was the POA for my elderly aunt who had a bad fall and ended up with two acute hospital admissions, followed by an acute rehab hospital admission, followed by a nursing home skilled care admission, and concluding with an ALF admission for the last two years of her life. At that time I deducted 100% of her ALF bills and the IRS never said a word. I don't know if I was right for my aunt and I am just being too conservative with my father's ALF bills now, or if I was just lucky the IRS never got around to challenging my aunt's taxes.

On the final question, I know our local Type A contract CCRC takes the view that they reviewed your finances before they accepted you as a resident, so if you run out of money they share in the responsibility and they are not going to kick you out. However, the contract you sign says you will not give away "a significant portion" of your savings, as in "Gee, after paying for our grandchildren's college education we can no longer afford to pay our monthly fees". Also, the contract says the CCRC has the right to review your finances at any time. I think this is in case other residents gossip that you have a gambling problem, or you are bragging about tricking the CCRC by giving all your money to your children after you moved into the CCRC, etc.

[TN_Boy]

DW and I are (fortunately) many years away from this, but I want to consider it in long range financial planning. CCRC = continuing care retirement community for those unfamiliar.

https://en.wikipedia.org/wiki/Continuin ... ted_States

I asking about the life care contract scenario:

CCRCs offering Type A or life care contracts guarantee their residents shelter, residential services, and amenities along with personal assistance and nursing care for the rest of their lives in return for an initial entrance fee and a monthly payment schedule.

If a person has a large tIRA balance upon reaching an age requiring assisted living, can the initial entrance fee and monthly payments be withdrawn from the tIRA and deducted on schedule A as a qualified medical expense? I'm assuming current tax law. If so, are there any reasons not to plan for this? I see this strategy as possibly superior to LTCI (which I don't have) for those who have adequate assets. Thanks.

I'm confused by part of the question. Suppose TN_Boy enters a CCRC at age 70 and puts down 200k for the initial entrance fee. Five years later, TN_Boy needs to move to assisted living within the CCRC.

Are you asking if any of the 200k entrance fee paid years before the need for assisted living is deductible? I would have thought the answer would be a resounding no, but I can't say I've looked it up.

[ChrisC]

I'm confused by part of the question. Suppose TN_Boy enters a CCRC at age 70 and puts down 200k for the initial entrance fee. Five years later, TN_Boy needs to move to assisted living within the CCRC.

Are you asking if any of the 200k entrance fee paid years before the need for assisted living is deductible? I would have thought the answer would be a resounding no, but I can't say I've looked it up.

Why would you have said no, if the $200K entrance fee is considered a prepaid eligible medical expense? I believe the CCRC, upon which we're on the waitlist, has provided some guidance that some or all of the entrance fee we would pay would be deductible as a prepaid medical expense. (We would be in a Type C-CCRC, with equity purchase of our unit, with 10% of the equity purchase treated as an entrance fee). I don't know if the CCRC amortizes the entrance fee as a potential deductible medical expense over some schedule.

The OP in this thread appears to have received concrete guidance from his CCRC that some of his entrance fee for a Type A-CCRC would be tax affected. viewtopic.php?f=1&t=296869&p=4879326#p4879326

[TN_Boy]

I'm confused by part of the question. Suppose TN_Boy enters a CCRC at age 70 and puts down 200k for the initial entrance fee. Five years later, TN_Boy needs to move to assisted living within the CCRC.

Are you asking if any of the 200k entrance fee paid years before the need for assisted living is deductible? I would have thought the answer would be a resounding no, but I can't say I've looked it up.

Why would you have said no, if the $200K entrance fee is considered a prepaid eligible medical expense? I believe the CCRC, upon which we're on the waitlist, has provided some guidance that some or all of the entrance fee we would pay would be deductible as a prepaid medical expense. (We would be in a Type C-CCRC, with equity purchase of our unit, with 10% of the equity purchase treated as an entrance fee). I don't know if the CCRC amortizes the entrance fee as a potential deductible medical expense over some schedule.

The OP in this thread appears to have received concrete guidance from his CCRC that some of his entrance fee for a Type A-CCRC would be tax affected. viewtopic.php?f=1&t=296869&p=4879326#p4879326

Mostly because at the time you move into a CCRC, you are not requiring any help that would be deductible.

But as I said, I noted that I had not looked it up. I did some more searching around, and find that of course you are right, some of the fee may be tax deductible.

I find this surprising, because this means you are deducting *medical* expenses for care that you might literally never need. Using part of my example above, I pay 200k to move into a CCRC, but sadly, rather than moving into assisted living after five years, I'm hit by a bus while crossing the street before I need any LTC support. So I got to deduct some expenses for moving into a very nice independent living cottage or apartment. That is a very nice loophole.

So I learned something, but It is counter-intuitive (to me at least). I found this article concise and interesting:

http://ciccarelliadvisory.com/newswp/20 ... mmunities/

I quote from the article "The idea of prepaid medical deductions might sound too good to be true, but it has been affirmed by the U.S. Tax Court ruling ...."

The tax planning opportunities are eye-opening to me. I did not realize that CCRCs offered this sort of tax management possibilities. It makes them a lot more interesting.

[RudyS]

In my experience, every CCRC sends out a letter before tax time each year which states the dollar amount of previous year entrance fees and monthly fees which are tax deductible as a medical expense.

This has been my experience with my parents CCRC.

For us too. IRS Code Section 213 is referred in the letter.

[FIREchief]

Are you asking if any of the 200k entrance fee paid years before the need for assisted living is deductible? I would have thought the answer would be a resounding no, but I can't say I've looked it up.

Yes, that is pretty much what I was asking. Based upon some of the excellent responses, it sounds like a person entering the community is paying a premium (entrance fee plus monthly fees) to insure future assisted living or skilled nursing care. This sounds a lot like paying LTC insurance premiums, which I believe are deductible as medical expenses per the IRS.

I'm not really sure where we would "look this up." I've googled a bit and haven't found much. That's why I started this thread (and I'm glad I did). I just found some info on a CCRC in my area. It looks like a really nice place. Entrance fees are $188K to $750K depending upon unit selected (they have both traditional apartment configurations and a variety of "terrace" homes (think townhouses or duplexes) ranging up to 3 bdrm/garage/2000+ sq ft. Monthly fees (cover utilities, housekeeping, all maintenance as well as basic meals for those in assisted lvng/SNF) ranging from $2000 to $5000 for an individual, slightly more for couples. The entrance fees are indicated to be 90% refundable when a person "moves out" (which I would assume would include both leaving the facility and death). I assume that if a person were to run out of money, that the entrance fee would be consumed by any unpaid monthly fees. For those who have deeper experience with CCRCs, does this all sound about right?

[TN_Boy]

Are you asking if any of the 200k entrance fee paid years before the need for assisted living is deductible? I would have thought the answer would be a resounding no, but I can't say I've looked it up.

Yes, that is pretty much what I was asking. Based upon some of the excellent responses, it sounds like a person entering the community is paying a premium (entrance fee plus monthly fees) to insure future assisted living or skilled nursing care. This sounds a lot like paying LTC insurance premiums, which I believe are deductible as medical expenses per the IRS.

I'm not really sure where we would "look this up." I've googled a bit and haven't found much. That's why I started this thread (and I'm glad I did). I just found some info on a CCRC in my area. It looks like a really nice place. Entrance fees are $188K to $750K depending upon unit selected (they have both traditional apartment configurations and a variety of "terrace" homes (think townhouses or duplexes) ranging up to 3 bdrm/garage/2000+ sq ft. Monthly fees (cover utilities, housekeeping, all maintenance as well as basic meals for those in assisted lvng/SNF) ranging from $2000 to $5000 for an individual, slightly more for couples. The entrance fees are indicated to be 90% refundable when a person "moves out" (which I would assume would include both leaving the facility and death). I assume that if a person were to run out of money, that the entrance fee would be consumed by any unpaid monthly fees. For those who have deeper experience with CCRCs, does this all sound about right?

LTC insurance is deductible. Because it is, I shouldn't have been so surprised that the entrance fees to a CCRC are deductible, since both are ways to prepay for care. But of course yearly LTC insurance premiums are relatively small (compared to the standard deduction for a couple).

But wow, if you did want to pony up say 300k or 400k for an entrance fee to a CCRC, you could do a huge Roth conversion that year, and if nothing else, make your heirs happy.

Tax considerations aside, my biggest concern about CCRC is how good is their assisted living and skilled nursing? And how good will it be if/when I need it? If you are not tied to a CCRC, and you wind up in a facility that is not suiting your needs, you can move. With a CCRC, you can still move, but you've perhaps wasted a lot of money.

Also note you'd really want a CCRC with assisted living, memory care, and skilled nursing.

[GeoffD]

Tax considerations aside, my biggest concern about CCRC is how good is their assisted living and skilled nursing? And how good will it be if/when I need it? If you are not tied to a CCRC, and you wind up in a facility that is not suiting your needs, you can move. With a CCRC, you can still move, but you've perhaps wasted a lot of money.

Also note you'd really want a CCRC with assisted living, memory care, and skilled nursing.

Personally, my biggest concern would be the solvency of the CCRC. A CCRC in Texas went under in November. An awful lot of them are actuarially insolvent and I don't see how you'd be able to figure that out. My stepfather lost a couple hundred thousand deposit on new construction on one in Rhode Island at the Great Recession. You're generally considered to be an unsecured creditor so you get nothing.

My mother is in memory care at a CCRC now but without the big buy-in. It was by far the best memory care facility I looked at. I looked at a few other memory care units at CCRCs that weren't all that great. You really need to dig into the quality of care for skilled nursing and memory care rather than focusing on the glitzy independent living part of the shop where they're selling. It's all over the map since it's such an enormous labor cost.

[FIREchief]

LTC insurance is deductible. Because it is, I shouldn't have been so surprised that the entrance fees to a CCRC are deductible, since both are ways to prepay for care. But of course yearly LTC insurance premiums are relatively small (compared to the standard deduction for a couple).

Yep. Of course, we should clarify, that "a portion" of the entrance fee and monthly fees are deductible (per previous posts in this thread), and for younger independent residents that deductible portion could reasonably be looked at as similar to LTC insurance.

Tax considerations aside, my biggest concern about CCRC is how good is their assisted living and skilled nursing? And how good will it be if/when I need it? If you are not tied to a CCRC, and you wind up in a facility that is not suiting your needs, you can move. With a CCRC, you can still move, but you've perhaps wasted a lot of money.

Also note you'd really want a CCRC with assisted living, memory care, and skilled nursing.

I agree. From what I'm seeing, it looks like any CCRC in my area would have all of those.

[FIREchief]

Tax considerations aside, my biggest concern about CCRC is how good is their assisted living and skilled nursing? And how good will it be if/when I need it? If you are not tied to a CCRC, and you wind up in a facility that is not suiting your needs, you can move. With a CCRC, you can still move, but you've perhaps wasted a lot of money.

Also note you'd really want a CCRC with assisted living, memory care, and skilled nursing.

Personally, my biggest concern would be the solvency of the CCRC. A CCRC in Texas went under in November. An awful lot of them are actuarially insolvent and I don't see how you'd be able to figure that out. My stepfather lost a couple hundred thousand deposit on new construction on one in Rhode Island at the Great Recession. You're generally considered to be an unsecured creditor so you get nothing.

Thanks. That sounds like good advice. I would tend to be more comfortable with one with some level of participation by a non-profit entity rather than one that is 100% business. I would also think that history of the facility (and parent "company", if applicable) would be worth considering. I would also want to investigate what level of state oversight exists and, if meaningful, what the facility's compliance record is.

My mother is in memory care at a CCRC now but without the big buy-in. It was by far the best memory care facility I looked at. I looked at a few other memory care units at CCRCs that weren't all that great. You really need to dig into the quality of care for skilled nursing and memory care rather than focusing on the glitzy independent living part of the shop where they're selling. It's all over the map since it's such an enormous labor cost

.

That makes sense. I think there are a lot of trade-offs. One of the appeals that CCRCs have to me is the progressive nature of possible care for a married couple (i.e. where both can start in independent living, but stay close if/when one needs a higher level of care). I would envision "grades" of assisted living, where more functional residents might be able to stay in their independent living quarters but benefit from on-site assistance for relatively minor help. Have others seen it work this way? I'm just speculating. I've also seen much good advice suggesting that with any assisted living or SNF scenario, one of the most important factors for quality care is frequent oversight by a close family member or friend. That could obviously be easier in some CCRC scenarios versus non-CCRC scenarios (i.e. stand alone "nursing homes").

[PaulF]

But wow, if you did want to pony up say 300k or 400k for an entrance fee to a CCRC, you could do a huge Roth conversion that year, and if nothing else, make your heirs happy.

That is true only if you were funding the entrance fee from post-tax sources. I imagine most of us with sizable tax-deferred accounts would withdraw from tax-deferred to fund the CCRC fee, then take a deduction to eliminate (most of) the tax liability.

[TN_Boy]

But wow, if you did want to pony up say 300k or 400k for an entrance fee to a CCRC, you could do a huge Roth conversion that year, and if nothing else, make your heirs happy.

That is true only if you were funding the entrance fee from post-tax sources. I imagine most of us with sizable tax-deferred accounts would withdraw from tax-deferred to fund the CCRC fee, then take a deduction to eliminate (most of) the tax liability.

That's true. Where to pull the money from depends on the individual situation. Though a third (often less convenient) option would be selling one's current house and using those proceeds for the buy-in.

And of course, the amount of the deduction depends on the type of CCRC and such.

Even so, I was quite intrigued by the potential tax planning opportunities.

[FIREchief]

Even so, I was quite intrigued by the potential tax planning opportunities.

Yep. This is exactly what led me to ask the OP question. I'm in the midst of my annual long term tax planning (which includes Roth conversion planning) and I wanted to understand and evaluate the possible effects of moving into a CCRC five - fifteen years down the road. On my established glide path, I was projecting a steady burn down of after tax assets to heavily fund continuing Roth conversions resulting long term in more Roth, less tIRA, less after tax and smaller RMDs. This is somewhat "conventional wisdom" around here. The CCRC option changes the equation, as a larger after tax pool can fund (or at least help fund) the initial buy in and larger RMDs can pay the monthly fees. I believe it can somewhat mitigate the unknowns of long term care expenses, as the annual cash flows would be somewhat stable and predictable regardless of need for assisted living or skilled nursing care.

[Chip]

My father is currently in an assisted living facility based on a physician determination of need following an acute care hospitalization. When I did his taxes this year I considered whether he might be able to claim 100% of his ALF bills for this reason. I went to the IRS web site and ultimately concluded the IRS would not let him deduct the room and meals portion of his ALF bill, and I could only deduct his $400 per month "Level of Care" charge for management and supervision of his medications.

When my mother was in an ALF I prepared her returns deducting essentially all of her ALF expenses. This was after receiving guidance from the facility that this was allowed by the code if the primary purpose of her living there was to receive the required medical care. Plus of course meeting the 2/5 ADL, supervision of care, care plan, etc. requirements. I think they were drawing from 26 U.S. Code § 213 and 26 U.S. Code § 7702B (for the definition of chronically ill individual).

Up until I received the info from the facility and investigated it I had only been deducting the level of care charges, as you are. But after deciding that the full deduction was warranted I amended 3 prior year returns and received refunds.

[fourwheelcycle]

When my mother was in an ALF I prepared her returns deducting essentially all of her ALF expenses. This was after receiving guidance from the facility that this was allowed by the code if the primary purpose of her living there was to receive the required medical care. Plus of course meeting the 2/5 ADL, supervision of care, care plan, etc. requirements. I think they were drawing from 26 U.S. Code § 213 and 26 U.S. Code § 7702B (for the definition of chronically ill individual).

Yes, I read the same info. My father does not need help with any of his ADLs, so that was one of the things that stopped me from deducting all of his ALF expenses.

[PaulF]

But wow, if you did want to pony up say 300k or 400k for an entrance fee to a CCRC, you could do a huge Roth conversion that year, and if nothing else, make your heirs happy.

That is true only if you were funding the entrance fee from post-tax sources. I imagine most of us with sizable tax-deferred accounts would withdraw from tax-deferred to fund the CCRC fee, then take a deduction to eliminate (most of) the tax liability.

That's true. Where to pull the money from depends on the individual situation. Though a third (often less convenient) option would be selling one's current house and using those proceeds for the buy-in.

And of course, the amount of the deduction depends on the type of CCRC and such.

Even so, I was quite intrigued by the potential tax planning opportunities.

Yes, you are quite correct. I realize that, all along, I have been thinking that I would sell the house to fund the entrance CCRC fee if/when the time came. AND I have also been thinking that I would take money from tax-deferred for the entrance fee (due to tax efficiency).
Well, .

So, yes, you are correct. It is quite possible more of us WILL be paying the entrance fee from post-tax sources than I thought! Mea culpa.

[RetiredAL]

My Dad is in an ALF with 2+ ADL's, placed there March 2019.

Last year at tax time, I talked with his Taxman ( a CPA ) and was told 100% of the ALF charges would be a deductible Med Expense.

In meeting this the Taxman this year, he needed the 1099-LTC form, using that as reimbursement of medical expenses on his in-office worksheet. I have not gotten the actual tax return back yet, so I don't yet know what shows where.

[bayview]

When my mother was in an ALF I prepared her returns deducting essentially all of her ALF expenses. This was after receiving guidance from the facility that this was allowed by the code if the primary purpose of her living there was to receive the required medical care. Plus of course meeting the 2/5 ADL, supervision of care, care plan, etc. requirements. I think they were drawing from 26 U.S. Code § 213 and 26 U.S. Code § 7702B (for the definition of chronically ill individual).

Yes, I read the same info. My father does not need help with any of his ADLs, so that was one of the things that stopped me from deducting all of his ALF expenses.

My mother is fairly independent (although klutzy) in her ADLs, but she qualifies under the second provision:

26 US Code § 7702B(c)(2)(A)(iii):
- requiring substantial supervision to protect such individual from threats to health and safety due to severe cognitive impairment.

This is preceded by an “or” at the end of (ii), meaning that it is independent of the requirement of needing help with ADLs.

If your father has significant cognitive impairment, ask the physician if this section would apply to him.

(I am not in the legal field, and I’m writing on a tablet, so I apologize if I have botched the citation.)

Edit to add: as some might wonder how this level of dementia coexists with semi-independence in ADLs, she has vascular dementia and has lost nearly all short term memory, meaning that she doesn’t know if she just ate, doesn’t remember that she takes meds, much less whether she’s taken then, rarely remembers where she is, doesn’t remember/realize that there is nursing staff with her every day, and essentially can’t learn anything new due to inability to remember what she was just taught. Otherwise, her personality is unchanged, and she can dress, make her bed, go downstairs to eat, feed her cat, attend religious services, sing along with any song from the sixties or earlier, etc.

[FactualFran]

But wow, if you did want to pony up say 300k or 400k for an entrance fee to a CCRC, you could do a huge Roth conversion that year, and if nothing else, make your heirs happy.

An alternative to doing a huge Roth conversion in one year is to do smaller conversions during many years. That would possibly avoid having a higher than usual marginal tax rate on the conversion.

Once the Roth is used to fund the CCRC entrance fee, heirs will get only up to the refundable portion of the entrance fee.

[TN_Boy]

But wow, if you did want to pony up say 300k or 400k for an entrance fee to a CCRC, you could do a huge Roth conversion that year, and if nothing else, make your heirs happy.

An alternative to doing a huge Roth conversion in one year is to do smaller conversions during many years. That would possibly avoid having a higher than usual marginal tax rate on the conversion.

Once the Roth is used to fund the CCRC entrance fee, heirs will get only up to the refundable portion of the entrance fee.

I'm not quite following, but since I was wrong before it might just be me.

I wouldn't use the Roth to fund the entrance fee in any scenario. My thinking was that suppose your entrance fee is 400k, of which 200k is deductible (I'm making up numbers here, since I don't know the typical percentage of an entrance fee that is deductible).

I pay the entrance fee using either money from the sale of my current house, or from money in a brokerage account or bank account.

Now I do a larger ROTH conversion, maybe 150k to 200k. I deduct the 200k from my taxable income (well, 200k - 7.5% of my gross income which will be higher because of the Roth conversion ....).

So now I'm in my retirement community and my Roth IRA is bigger while my traditional IRA is smaller.

Once you are in the retirement community, even if some of the monthly fees are deductible, I doubt the medical deduction will be as large as it will the year you pay the entrance fee.

That's one approach. Another would be to pull the money from a regular IRA to pay the entrance fee, using the medical deduction of 200k to offset much of the income caused by the IRA withdrawal. The proceeds from the house sale just go into taxable savings. My traditional IRA got smaller, but instead of extra money in a Roth, there is extra money in a brokerage account.

I haven't tried to do tax modeling for the right approach here. But I'd rather have 200k more in a Roth than in a brokerage account.

[FactualFran]

I'm not quite following, but since I was wrong before it might just be me.

I wouldn't use the Roth to fund the entrance fee in any scenario. My thinking was that suppose your entrance fee is 400k, of which 200k is deductible (I'm making up numbers here, since I don't know the typical percentage of an entrance fee that is deductible).

It is not necessary to use a Roth IRA. However, those who plan to use money in a traditional IRA to pay the entrance fee can reduce the amount of income tax owed by converting some money from a traditional IRA to a Roth IRA in years prior to when the entrance fee will be paid.

Taking $400k from a traditional IRA in one year would likely result in a much higher than usual marginal tax rate. In addition, it would increase the Adjusted Gross Income by $400k and reduce the deductible amount of medical expenses in the entrance fee.

Converting $100k from a traditional IRA to a Roth IRA in each of four years would likely result in a not as higher marginal tax rate in each of those years. In addition, in the year the entrance fee is paid, the Adjusted Gross Income would be increased by much less than $400k and result in a greater deductible amount of medical expenses in the entrance than if the Adjusted Gross Income for that year included a $400k withdrawal from a traditional IRA.

[TN_Boy]

I'm not quite following, but since I was wrong before it might just be me.

I wouldn't use the Roth to fund the entrance fee in any scenario. My thinking was that suppose your entrance fee is 400k, of which 200k is deductible (I'm making up numbers here, since I don't know the typical percentage of an entrance fee that is deductible).

It is not necessary to use a Roth IRA. However, those who plan to use money in a traditional IRA to pay the entrance fee can reduce the amount of income tax owed by converting some money from a traditional IRA to a Roth IRA in years prior to when the entrance fee will be paid.

Taking $400k from a traditional IRA in one year would likely result in a much higher than usual marginal tax rate. In addition, it would increase the Adjusted Gross Income by $400k and reduce the deductible amount of medical expenses in the entrance fee.

Converting $100k from a traditional IRA to a Roth IRA in each of four years would likely result in a not as higher marginal tax rate in each of those years. In addition, in the year the entrance fee is paid, the Adjusted Gross Income would be increased by much less than $400k and result in a greater deductible amount of medical expenses in the entrance than if the Adjusted Gross Income for that year included a $400k withdrawal from a traditional IRA.

I'm not really following the point here, so maybe I'm missing something. If it made sense to convert 100k of Traditional to Roth, I should already be doing that. That big a conversion will already bump up my tax rate quite a bit (100k of Roth conversion plus whatever other income I need to actually live on) for four years in a row.

I'd rather just use taxable accounts and/or proceeds from sale of house.

Doing the Roth conversion(s) before the year of the entrance fee means you are making no use of the potential tax deduction from the fee, which I thought was the interesting possibility here. I do get the point that if you do a large Roth conversion, it drives up the income which means less of the entrance fee is deductible, and I mentioned that.

But all this tax stuff .. you really have to model it with your specific situation.

[FactualFran]

But all this tax stuff .. you really have to model it with your specific situation.

That's right, it depends on the specific situation. Not everyone has taxable accounts and/or proceeds from the sale of house as sources for an entrance fee.

Doing Roth conversions before the year of the entrance fee does not change the fact that the medical portion of the of the entrance fee is deductible for the year it is paid. You see the point that having a lower adjusted gross income for the year the entrance fee is paid means more of the medical portion of the entrance fee is deductible.

Using married filing jointly tax rates for 2019 with all taxable income taxed at the ordinary income tax rate, a couple usually with $100,000 of taxable income who had an additional $400,000 of income to pay that amount as an entrance fee, 25% of which was medical expenses, would pay about an additional $89,800 in income tax.

By doing Roth conversions of $100,000 for three years and having an additional $100,000 of income in the year the entrance fee was paid, an additional $71,200 in income tax would have been paid over those years.

[celia]

Besides the CCRC statement, I presume you also need a doctor’s statement saying you need it medically, before you can take the deduction. Correct?

[TN_Boy]

But all this tax stuff .. you really have to model it with your specific situation.

That's right, it depends on the specific situation. Not everyone has taxable accounts and/or proceeds from the sale of house as sources for an entrance fee.

Doing Roth conversions before the year of the entrance fee does not change the fact that the medical portion of the of the entrance fee is deductible for the year it is paid. You see the point that having a lower adjusted gross income for the year the entrance fee is paid means more of the medical portion of the entrance fee is deductible.

Using married filing jointly tax rates for 2019 with all taxable income taxed at the ordinary income tax rate, a couple usually with $100,000 of taxable income who had an additional $400,000 of income to pay that amount as an entrance fee, 25% of which was medical expenses, would pay about an additional $89,800 in income tax.

By doing Roth conversions of $100,000 for three years and having an additional $100,000 of income in the year the entrance fee was paid, an additional $71,200 in income tax would have been paid over those years.

Which is pointing to the wisdom of the OP thinking about this well before the need arises . Since in your example here, you'd want to be tax planning well before making the jump!