As people age, it can be more difficult to live alone and meet basic needs. Assisted living facilities and social workers provide additional support for seniors to live independently in a safe environment. Paying for assisted living can be expensive, which is why many investors wonder if assisted living is tax deductible. Depending on your income and how much you pay for assisted living, this could be considered a medical deduction. Here’s what you need to know about this potential tax deduction and who may qualify.
A financial advisor can help you make a financial plan to cover assisted living costs and other health costs.
What is assisted living?
Assisted living is the term used to provide assistance to cover the six most common activities of daily living: bathing, walking, dressing, using the toilet, moving to bed, and eating. While many seniors are quite capable of caring for themselves, sometimes they need extra help with one or more of these six activities.
Who needs assisted living?
Those seeking home care usually need help with at least two daily tasks from the list above. Home care can be provided by a care facility or by a home caregiver in the patient’s home. The location and amount of care usually depends on the patient’s condition and budget.
This enhanced care can be short or long term depending on the patient’s needs. For short-term help, they may be recovering from surgery or injury. Long-term patients may suffer from declining health or have a permanent condition.
How much does assisted living cost?
The cost of home care depends on where you live, where care is provided 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 help services cost an average of $169 per day ($5,148 per month).
How to pay for assisted living
There are many ways investors can prepare for assisted living expenses. Typically, these costs are covered by insurance, savings, family and friends, or the government. Here are five examples:
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disability insurance. If your stay or your assisted living needs are short-term, disability insurance can pay for treatment during your convalescence.
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Long term care insurance. Long-term care insurance generally covers long stays in a facility. Benefits may have an exclusion period that requires policyholders to cover the first portion of expenses before the insurance company kicks in.
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Savings and investments. Many investors pay for assisted living care from their savings and investments, either because they chose not to purchase insurance or because they could not qualify. This approach is also known as “self-insurance”.
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Family and friends. In some cases, family and friends step in to help cover the costs of assisted living. It is usually one of the less attractive options due to the undue burden it can place on their finances.
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Government programs. Some local, state, or federal government programs cover a portion of the cost of assisted living. With this option, patients generally cannot choose the level of care or location of the facility. Additionally, you may need to spend your personal assets before becoming eligible.
Is assisted living tax deductible?
For tax purposes, assisted living expenses are classified as medical expenses. Deductions are documented on Schedule A of your Federal Income Tax Form 1040 under Itemized Deductions. Additionally, only qualifying medical expenses greater than 7.5% of your adjusted gross income (AGI) are eligible for a tax deduction.
Let’s say you have an AGI of $100,000 with $12,000 in medical expenses. Your medical expenses eligible for the tax deduction are $4,500.
The ability to deduct your payments also depends on the reason for your stay at the assisted living facility. If you are in assisted living primarily for medical reasons, the full cost is deductible as a medical expense. This includes meals and accommodation.
However, if your stay is primarily for non-medical reasons, only actual medical care is tax deductible. For these patients, meal and accommodation costs are excluded.
Conclusion
Assisted living can be expensive while recovering from an injury or as you get older. These expenses are part of your total medical expenses for calculating tax deductions. Only the part that exceeds 7.5% of your adjusted gross income can be deducted. We recommend that you discuss your eligibility for tax deductions with your tax advisor. Also, contact your financial advisor to discuss how to pay for care through insurance, savings, or both.
Tips for Covering Retirement Expenses
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A financial advisor can help you create a plan to cover your medical needs in retirement. SmartAsset’s free tool connects you with up to three financial advisors who serve your area, and you can interview your matching advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
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Inflation often hits retirees harder than others because they work on a fixed income. Whether you’re paying for assisted living or your normal expenses, it helps to understand how inflation can affect those bills. Our Inflation Calculator estimates your purchasing power over time based on different inflation rates.
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