As people age, it can be more challenging to live by yourself and handle your basic needs. Assisted living facilities and care workers provide additional help for seniors to live independently in a safe environment. Paying for assisted living can be expensive, so many investors wonder if assisted living is tax deductible. Depending on your income and how much you pay for assisted living, it could qualify as a medical deduction. Here’s what you need to know about this potential tax deduction and who can qualify.
A financial advisor can help you put a financial plan together to cover assisted living and other health costs.
What Is Assisted Living?
Assisted living is the term for providing help to cover the six most common activities of daily living – bathing, walking, dressing, toileting, bed transfer and eating. While many seniors are fully capable of taking care of themselves, sometimes they need extra assistance in one or more of these six activities.
Who Needs Assisted Living?
Those who seek assisted living care generally need help with at least two everyday tasks from the list above. Assisted living care may be through a care facility or through a home health caregiver in the patient’s own home. The location and amount of care typically depend on the patient’s condition and budget.
This enhanced care can be short or long-term depending on a patient’s needs. For short-term help, they may be recovering from surgery or injury. Long-term patients may be suffering from declining health or have a permanent condition.
How Much Does Assisted Living Cost?
The cost of assisted living care depends on where you live, where the care is given and how much care you need. A recent study by Genworth, a life insurance company, estimates that the national median monthly rate for assisted living is $4,500. This equates to approximately $148 per day.
By comparison, a private room in a nursing home with higher levels of care costs an average of $297 per day ($9,034 per month). And home health aide services average $169 per day ($5,148 per month).
How to Pay for Assisted Living
There are many ways that investors can prepare for assisted living expenses. In general, these costs are covered by insurance, savings, family and friends or the government. Here are five examples:
- Disability insurance. If your assisted living stay or needs are short-term, disability insurance may pay for care while you recover.
- Long-term care insurance. Long-term care insurance typically covers longer stays in a facility. Benefits may have an exclusion period which requires that policyholders cover the first portion of expenses before the insurance company steps in.
- Savings and investments. Many investors pay for assisted living care out of their savings and investments either because they chose not to buy insurance or because they couldn’t qualify. This approach is also known as “self-insurance.”
- Family and friends. In some cases, family and friends step in to help cover the costs of assisted living. This is generally one of the least attractive options because of the undue burden it can place on their finances.
- Government programs. Some local, state or Federal government programs cover a portion of the cost of assisted living. With this option, patients typically cannot choose the level of care or where the facility is located. Additionally, you may be required to spend down your personal assets before becoming eligible.
Is Assisted Living Tax Deductible?
For tax purposes, assisted living expenses are classified as medical expenses. The deductions are documented on Schedule A of your Form 1040 Federal tax return under Itemized Deductions. Additionally, only the allowable medical expenses above 7.5% of your adjusted gross income (AGI) qualify as a tax deduction.
Let’s say that you have an AGI of $100,000 with $12,000 of medical expenses. Your medical expenses eligible for tax deduction is $4,500.
The opportunity to deduct your payments also depends on the reason for your stay in the assisted living facility. If you’re in the assisted living facility primarily for medical reasons, then the entire cost is deductible as a medical expense. This includes the meals and lodging.
However, if your stay is primarily for non-medical reasons, then only the actual medical care is tax-deductible. For these patients, the cost of meals and lodging are excluded.
Assisted living can be expensive while recovering from an injury or as you age. These expenses are part of your total medical expenses for tax deduction calculations. Only the portion that exceeds 7.5% of your adjusted gross income can be deducted. We recommend speaking with your tax advisor about your eligibility for tax deductions. Additionally, contact your financial advisor to discuss how to pay for care through insurance, savings or both.
Tips for Covering Retirement Expenses
- A financial advisor can help you create a plan to cover your medical needs in retirement. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Inflation often affects retirees harder than others because they’re working off of a fixed income. Whether you’re paying for assisted living or your normal expenses, it helps to understand how inflation can affect these bills. Our inflation calculator estimates your buying power over time based on different inflation rates.
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