A popular option among seniors is living in “continuing care retirement communities” or CCRCs. These facilities are often owned by not for profit agencies, many of which manage multiple locations. For the residents, it means not having to deal with home maintenance, readily available meals, and access to on-site medical services, from minor things, to skilled nursing care.
Many of the facilities offer a Life Care option, in which the resident pays a monthly fee, as well as a (usually hefty) buy-in fee to enter the facility, which may have a declining refund option. The declining refund option might guarantee a full refund for the first year or two, and then reduce by 10% per year until it reaches a minimum level like 20%, or completely disappears. This allows the surviving family members to recoup some of the cost if the resident dies within a few years of moving in. In many facilities, the buy-in fee and the monthly service charges qualify for an income tax deduction as a medical expense. The amount is usually calculated by either the facility or a consulting firm, and provided to the residents to use when they prepare their income tax returns. The average amount of the buy-in and monthly service fees which qualify for use as a medical deduction is around 30%.
Some facilities will allow a discount on the buy-in fee and/or the monthly fees, if the resident has a good long-term care insurance policy in force. Generally, the resident or his representative can begin to draw on the policy benefits, when it becomes necessary to be transferred to the nursing center.
Some income tax planning opportunities present themselves with respect to the buy-in fee. Not all residents have enough taxable income in an average year to take advantage of the medical deduction from the buy-in on their tax return. That offers two possible scenarios. The deductible portion of the buy-in fee is actually deductible on the resident’s income tax return for the year in which it is paid. Sometimes, paying part of it in one year, before moving in, and the remainder in the following year allows the resident to divide the deduction between two tax years, and avoid being unable to use part of it. The other scenario would be to pay the buy-in fee all in one year, but then to increase his income for that year, either by harvesting capital gains in appreciated investments, or by taking larger than normal IRA distributions. There are advantages and pitfalls to each, so working with a tax professional is vital. It is very important that this be done before the payment of the buy-in fee, or at least before the end of the year, if it has already been paid.