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Unlock medical deductions in retirement communities

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in Small Business Tax

Perhaps an elderly relative—say, a parent or in-law—is reaching the point where he or she is no longer self-sufficient. The relative doesn’t quite need to enter a nursing home, but living alone is not an option.

Strategy: Investigate continuing care retirement communities (CCRCs) in the area. A CCRC may provide living accommodations that meet the needs of the relative. Icing on the cake: Residents may be in line for medical expense deductions.

You might also consider a CCRC for yourself (and your spouse, if married) down the road.

Here’s the whole story: Unlike a nursing home where a monthly fee is charged for ongoing services, the resident enters into a contract with the CCRC. Typically, a resident must pay an initial entrance fee and a regular monthly fee based on the type of care required. If a resident’s health status worsens, the level of care can be increased. (Of course, this also increases the monthly fee.) Thus, the CCRC resembles an assisted living facility more than a traditional nursing home.

As part of the contract, residents may benefit from services such as meals, transportation, household cleaning and social activities. They are free to come and go as they please.

This is not your grandfather’s retirement home: The physical accommodations can range from standard apartments to three-bedroom homes on wooded lots. In some cases, the digs are quite lavish. Depending on the type of CCRC, the resident may be characterized as a lessee or obtain an ownership interest in the property.

So where does the medical expense deduction come in? A percentage of the entrance fee and monthly charges may be attributed to medical care. For example, if a resident pays a total of $100,000 this year and 10% of the cost is attributable to health care, the $10,000 can be added to the resident’s deductible medical expenses. Currently, a taxpayer may deduct qualified medical expenses exceeding 7.5% of his or her adjusted gross income (AGI). The AGI floor is scheduled to increase to 10% in 2013.

A classic Tax Court case shows how residents may be eligible for top-dollar deductions (see box below).

When you’re investigating a CCRC, ask for an estimate of the cost attributable to medical care. This information should be factored into your decision.

Tip: If you’re paying the relative’s CCRC fees, you can deduct the medical expenses on your return as long as you provide more than half of the relative’s support. It doesn’t matter how much taxable income the relative earns.

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