To tap federal tax benefits of CCRCs, see your CPA

The following is a recent Chicago Tribune article discussing the various tax implications of moving to a Continuing Care Retirement Community.  As with all tax matters the issues are somewhat tricky so instead of attempting to summarize the information, we have set forth the article in full.

Continuing Care Retirement Communities (CCRCs) are increasingly popular with older adults who seek settings where they can age in place, moving from independent living to assisted living and ultimately skilled care. For this peace of mind, they generally pay an entry fee and monthly rent for the assurance of care the remainder of their lives.

CCRCs are seen as a kind of one-stop-shopping experience, says Bernard A. Krooks, founding partner of the New York City firm Littman Krooks. “They’re particularly attractive to husbands and wives; one might be in the assisted living portion, one in the independent living portion.”

Some CCRC residents may not understand that a portion of the CCRC entry and monthly fees related to health care may be tax deductible on federal taxes. Experts we spoke with offered some general advice, but it is always advisable to seek the expertise of your own CPA.

Health, entrance fees
Understanding this potential tax benefit can help extend the personal savings of CCRC residents. That is an important advantage, Krooks says.

That’s because many CCRCs require significant entry fees, according to Krooks. “When you are paying such a fee, it’s prudent to look at the tax implications of the cost,” he adds.

Putting aside for a moment the setting in which you live, it’s essential to know that to deduct any medical expense from income on federal income tax returns, a threshold has to be exceeded. Formerly, that threshold was 7.5 percent, Krooks reports.

In other words, to meet IRS guidelines your medical expenses have to exceed 7.5 percent of your adjusted gross income per year. If you earned $100,000 and had $8,000 in medical expenses the same year, only $500 — or $8,000 minus $7,500 — of the costs would be deductible.

”Under Obamacare, it is now 10 percent for folks under age 65,” Krooks says. “Those 65 or older get 7-1/2 percent until the end of this year. So your first threshold is whether your medical expenses are beyond 7.5 or 10 percent.”

In 2017, the threshold will be 10 percent for those over 65 as well.

Turning to CCRC residency, the only portions of CCRC expenses that are tax deductible are those expenses that are non-refundable and relate to health care.

“Part of your entry fee is refundable and part is not; it is the non-refundable part that is subject to tax deductibility,” Krooks says.

“The monthly fees are not ever refundable. They are tax deductible to the extent that they are related to medical care and exceed the 7.5 or 10 percent threshold.

“You get a statement from your CCRC that tells you for 2016 a certain percentage of your non-refundable entrance fee and monthly fees are tax deductible.”

Let’s suppose for example that you paid $1 million as an entry fee into a CCRC, and your estate will be refunded $800,000 when you die, Krooks says.

Your non-refundable expense is therefore $200,000. Of that $200,000, let’s say that 40 percent — or $80,000 — of that $200,000 is medically related, according to the yearly statement received from your CCRC. Let’s further say that your adjusted gross income is $100,000 and you’re older than 65, allowing you the 7.5 percent threshold.

Subtracting 7.5 percent or $7,500 of your income from the $80,000 you incurred in medical expenses would leave you with $72,500 in tax deductible medical expenses. If you’re in the 20 percent tax bracket, that is worth $14,500 to you.

Further considerations
One additional twist comes in those situations in which the parents do not have the money to pay an entry fee for CCRC residency. But their affluent son or daughter does.

“The rich child can gift the money to the parents. Or if the child pays more than half their support, he can take the tax deduction himself,” Krooks says. “And because he’s probably making more money than the parents, that’s worth more in a tax deduction. At the end of the day, you always have to talk to your tax advisor, because your personal circumstances will differ from those of others.”

If you fail to mention to your tax preparer that you are paying CCRC fees and therefore miss out on the deduction, you’re not entirely out of luck.

“Now you can go back to your tax preparer and amend up to the last three years of tax returns and get a refund,” says Hyman G. Darling, partner and head of the estate planning probate department at the law firm Bacon Wilson in Springfield, Mass.

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