Taxpayers can include in their medical expenses a part of a life care fee or founder’s fee that they pay either monthly or as a lump sum under an agreement with a continuing care retirement community.
Retirement communities that offer life care contracts are often referred to as life plan communities or continuing care retirement communities. The part of the life care fee that is deductible as a medical expense is the amount properly allocable to medical care. To be properly allocated to medical care, the life care fee agreement between the taxpayer and the retirement community has to require that the taxpayer pay a specific fee as a condition for the home’s promise to provide lifetime care that includes medical care.
According to IRS Publication 502, the taxpayer can use a statement from the retirement home to prove the amount properly allocable to medical care. The statement is required to be based on either the home’s prior experience or on information from a comparable home. In practice, most retirement communities that offer life care contracts hire actuaries to prepare these statements.
When the taxpayer moves into a life plan community, they have a choice to either deduct one lump sum medical expense for a portion of their entrance fee, calculated as the net present value of future medical expenses paid as part of the entrance fee, or a smaller annual amount each year, essentially amortizing the portion of the entrance fee that’s allocable to future medical expenses.
The upfront fee to move into a life plan community can easily reach 1 million or more, and the lump sum medical expense deduction can easily be 200, 000 to 400, 000 per year, depending on whether the taxpayer is single or if a couple is moving into the community together.
Taxpayers who move into a life plan community have major tax benefits. Planning opportunities in the year they move into the community. After all, if the taxpayer potentially has a 400, 000 medical expense deduction in the year they move in, they need to plan to make sure that they don’t waste the deduction because unused medical expenses don’t carry over to the following year.
Most taxpayers who move into life-plan communities sell their homes to fund their move-in fees. Taxpayers who have lived in their homes for many years often have a taxable gain on the sale of their home, even after factoring in the home sale exclusion of 250, 000, or 500, 000 for a married couple filing jointly.
For these taxpayers, a critical tax planning move is to make sure that they sell their home and move into the life plan community in the same calendar year so the medical expense deduction can be used to offset any taxable gain on the sale of the home. Other tax planning strategies can come into play as well.
For example, a taxpayer who finds themselves with otherwise wasted medical expense deductions in the year they move into the life plan community can consider a Roth conversion. A Roth conversion is a taxable event, but the large medical expense deduction can help keep the conversion tax-free. Doing so will also reduce the taxpayer’s required minimum distributions and can make future IRA distributions tax-free.