written by Kevin Hogan
Families with aging adults are facing ever increasing long-term care expenses related to home health care services and nursing home care. Many of these long-term care expenses, not covered by insurance, are eligible to be deducted on your personal income tax return as a medical expense. This article is an overview of the IRS tax rules for deducting long-term care expenses, and possibly claiming a parent as a dependent.
Medical Expenses – In General
Amounts paid for qualified medical care may be deducted on your personal income tax return as an itemized deduction on Schedule A to the extent the amounts paid are more than 7.5% of your adjusted gross income (AGI) for the year. For example, if your AGI is $50,000 for the year, then amounts spent for medical care above $3,750 ($50,000 * 7.5%), can be taken as an itemized deduction on your tax return.
You can generally include qualified medical expenses you pay for yourself, as well as those you pay for your spouse or dependent.
Qualified medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. Qualified medical expenses also include the premiums paid for health coverage and the amounts paid for transportation to get medical care.
Long-Term Care Expenses & Nursing Homes
The costs of qualified long-term care, including nursing home care, are deductible as medical expenses. Qualified long-term care services are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal-care services required by a chronically ill individual provided under a plan of care presented by a licensed health-care practitioner.
To qualify as chronically ill, an individual must be certified by a physician or other licensed health-care practitioner (e.g., nurse, social worker, etc.) as unable to perform, without substantial assistance, at least two activities of daily living (eating, toileting, transferring, bathing, dressing, and continence) for at least 90 days due to a loss of functional capacity, or as requiring substantial supervision for protection due to severe cognitive impairment (memory loss, disorientation, etc.).
The total costs paid to a nursing home, home for the aged, or similar institution, are fully deductible as a medical expense if the person is staying at the home because of a physical condition. However, if an individual is in the home primarily for personal or family reasons, then only the portion attributable to medical or nursing care, excluding meals and lodging, is deductible.
Long Term Care Insurance
Premiums paid for a qualified long-term care insurance contract are deductible as medical expenses (subject to an annual premium deduction limitation based on age, as explained below) to the extent they, along with other medical expenses, exceed 7.5% of adjusted gross income. A qualified long-term care insurance contract is insurance that covers only qualified long-term care services, doesn’t pay costs that are covered by Medicare, is guaranteed renewable, and doesn’t have a cash surrender value. A policy isn’t disqualified merely because it pays benefits on a per diem or other periodic basis without regard to the expenses incurred.
Qualified long-term care premiums are includible as medical expenses up to the following dollar amounts: For individuals over 60 to 70 years old, the 2012 limit on deductible long-term care insurance premiums is $3,500, and for those over 70, $4,370.
Claiming a Parent as a Dependent
If your parent qualifies as your dependent, you can include any medical expenses you incur for your parent along with your own when determining your medical deduction. If your parent doesn’t qualify as your dependent only because of the gross income or joint return test ((b) and (c), below), you can still include these medical costs with your own.
You may be able to claim your parent as a dependent, thus qualifying for an exemption, even though your parent is confined to a nursing home. To qualify, (a) you must provide more than 50% of your parent’s support costs, (b) your parent must not have gross income in excess of the exemption amount of $3,800 in 2012, (c) your parent must not file a joint return for the year, and (d) your parent must be a U.S. citizen or a resident of the U.S., Canada, or Mexico. Your parent can qualify as your dependent even though he or she doesn’t live with you, provided the support and other tests mentioned above are met.
Amounts you pay for qualified long-term care services required by your parent and eligible long-term care insurance premiums, discussed above, as well as amounts you pay to the nursing home for your parent’s medical care, are included in the total support you provide. If the support test ((a) above) can only be met by a group (you and your brothers and sisters, for example, combining to support your parent), a multiple support form can be filed to grant one of you the exemption, subject to certain conditions.
If you aren’t married and you are entitled to claim a dependency exemption for your parent, you may qualify for the head-of-household filing status, which is more favorable than the single filing status. You may be eligible to file as head of household even if the parent for whom you claim an exemption doesn’t live with you. In order to qualify for head-of-household status, generally you must have paid more than half the cost of maintaining a home for yourself and a qualifying relative for more than half the year.
In the case of a parent, however, you may be eligible to file as head of household if you pay more than half the cost of maintaining a home that was the principal home for your parent for the entire year. Thus, if your parent is confined to a nursing home, you are considered to be maintaining a principal home for your parent if you pay more than half the cost of keeping your parent in the nursing home.
As the average age in America continues to climb, the need for medical care for the elderly continues to increase. With the increasing costs of medical care, it is important to understand the IRS rules for deducting these costs on your personal tax return. Please contact us with any questions you may have about these rules and we can provide additional guidance.
Kevin specializes in tax consulting for businesses and individuals. His education includes a B.S. in accounting and business administration from the University of Kansas, a M.B.A. from the University of Kansas and a Master’s degree in Tax from Northern Illinois University.