Tax Issues for Long-Term Care

According to Morningstar (http://news.morningstar.com/articlenet/article.aspx?id=823957), 52.3% of those turning 65 will have a long-term care need during their lifetimes. The cost of this type of care is pricey; the average cost (https://www.genworth.com/dam/Americas/US/PDFs/Consumer/corporate/cost-of-care/131168_081417.pdf) of a semi-private room in a nursing home in 2017 was $85,775 ($97,455 for a private room). And the cost of a home health aide to provide personal care is about $22 per hour. For any individual or family impacted by the need for long-term care, there are serious financial issues to address. From a tax perspective, there is some relief.

Deducting long-term care costs

Long-term care is the kind of care used to address chronic conditions, such as Alzheimer’s or Parkinson’s disease, as well as helping those who cannot attend to their daily living activities (e.g,. dressing, bathing, transferring in and out of bed, etc.). The cost of long-term care is a deductible medical expense as long as it is prescribed by a doctor to address a medical need (e.g., a person’s diminished mental capacity that makes it dangerous to be left unattended). For 2017 and 2018, the threshold for itemizing medical costs is 7.5% of adjusted gross income, so total medical costs above this threshold are fully deductible for those who itemize rather than claim the standard deduction.

Paying a family member for care. It’s a tricky situation to classify payments to a family member for care in the patient’s home. There are income tax and employment tax issues. In most cases, the payments are taxable wages to the care provider. If the care provider is the patient’s child under age 21, there are no employment taxes. But if the child is older, then the patient (the parent) is a household employer who must file Schedule H of Form 1040, pay employment taxes, and furnish the child with Form W-2 reporting the wages.

Deducting long-term care premiums

If you have assets to protect and can’t afford to pay the high cost of long-term care out of your current income and/or savings, you may want to carry long-term care insurance. This policy can cover the cost of in-home and nursing home care as needed. Each policy has its own restrictions and limitations so understand the scope of your coverage when you buy a policy. For tax purposes, some or all of the premiums are treated as deductible medical expenses; it depends on your age at the end of the year.

Treating accelerated death benefits

A life insurance policy may provide accelerated death benefits to cover the cost of long-term care for an insured who is chronically or terminally ill. For someone terminally ill, all of the benefits received are tax free. For someone chronically ill, all benefits used for long-term care are tax free. If there’s a per diem payment that’s not applied toward care, it is tax free up to a set amount ($360 per day in 2018).

Tapping certain savings vehicles

If you experience a financial crunch when paying for health care, you can turn to your retirement savings (this should be a last resort to protect retirement savings). The distributions from your traditional IRA or 401(k) plan are taxable, but even if you’re under age 59½ you won’t be subject to the 10% penalty. This penalty exception applies to distributions that pay for costs in excess of the threshold amount (7.5% in 2018). The distributions must occur in the same year that costs are paid.

The need for long-term care isn’t restricted to the elderly; many younger people may require assistance. If there is an ABLE account set up for the benefit of a disabled person, any funds tapped for care are tax free; the distribution isn’t taxable income and it isn’t subject to penalty.

Conclusion

Statistics suggest that the need for long-term care for you, your spouse, or someone else close to you cannot be ignored. Check your state for partnership programs (http://www.aaltci.org/long-term-care-insurance/learning-center/long-term-care-insurance-partnership-plans.php#approved) that can help you pay for long-term care on an affordable basis and protect your assets.