Tax Savings Associated with Long-term Care

Navigating the process of helping a loved one find the right long-term care facility is often a sad and scary process. During this time your main concerns should have nothing to do with taxes.

However, it is still a significant financial decision, and for many, the costs can add up quickly.

There are various tax savings opportunities that can help offset these expenses and ease the financial burden. That many aren't taking full advantage of.

In this post, we’ll break down some tax benefits that may be available to individuals and families transitioning into long-term care. 

TAX DEDUCTIONS FOR LONG-TERM CARE

If your long-term care expenses exceed 7.5% of your AGI, you may be eligible for a tax deduction. This applies to both care at home and in a facility. Long-term care insurance premiums can also be deducted, though the deductible amount is based on age. 

Another option for covering these costs is utilizing Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs). These accounts allow for qualified medical expenses to be paid using pre-tax dollars, giving you a tax-advantaged way to cover long-term care costs. 

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PREPAID MEDICAL EXPENSES

One of the most overlooked tax benefits involves categorizing certain long-term care expenses as “prepaid” medical expenses.

This can apply to one-time start-up fees associated with joining a facility. The IRS allows seniors to deduct these expenses, as long as they meet the threshold of 7.5% of adjusted gross income (AGI). 

TAX CREDITS FOR CAREGIVERS

In addition to deductions, there are tax credits available to help offset some of the financial strain on family caregivers. The Child and Dependent Care Credit can provide a credit for a percentage of qualifying care expenses.

Those who qualify can save the lower of the following: 3,000 dollars or 35% of the qualified expenses.

This isn’t a direct deduction, but it can still provide valuable relief for those who are caring for loved ones while also managing a job. 

For those who are not sure about the difference between a tax credit vs a tax deduction. I like to think of it as:

• A tax credit is a dollar-for-dollar tax reduction.

• A tax deduction lowers your taxable income, resulting in a lower tax bill.

SALE OF YOUR HOME

For seniors moving into a long-term care facility, selling their home before the move may provide another tax break: the capital gains exclusion.

Seniors aged 55 and older may qualify to exclude up to $250,000 of capital gains from the sale of their home, and married couples may be eligible for a $500,000 exclusion. 

To qualify, the home must have been the primary residence for at least two of the last five years, and you must meet specific ownership and use requirements. 

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QUALIFIED LONG-TERM CARE SERVICES

The IRS defines qualified long-term care services as necessary medical services that help individuals with daily living activities, such as eating, toileting, transferring, bathing, dressing, and maintaining continence.

To qualify as “chronically ill,” an individual must be unable to perform at least two of these activities for at least 90 days. 

These services, when prescribed by a licensed healthcare practitioner, can often be deducted under the 7.5% AGI threshold mentioned earlier. 

DEDUCTION LIMITS

The IRS has set specific limits on how much long-term care insurance premiums can be deducted based on a taxpayer's age. Here’s a breakdown of the deduction limits: 

• 40 or younger: $480 

• 41-50 years old: $900 

• 51-60 years old: $1,800 

• 61-70 years old: $4,810 

• Over 70 years old: $6,020 

As you get older, you are eligible for more deductions which can help ease the financial burden of long-term care.

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FINAL THOUGHTS

Navigating the financial implications of long-term care can be overwhelming, but understanding the tax benefits available can make a significant difference. From deductions on long-term care expenses and insurance premiums to tax credits for caregivers and exemptions on home sales, there are many ways to reduce the financial burden of moving into a facility. 

To ensure you’re taking full advantage of these tax-saving opportunities, it’s important to consult with a tax professional. They can help you identify eligible expenses and ensure that you’re maximizing your deductions and credits based on your specific situation. 

By being proactive and informed, you can make your long-term care journey more financially manageable while enjoying peace of mind. 

If you have a question or topic that you’d like to have considered for a future episode/blog post, you can request it by going to www.retirewithryan.com and clicking on ask a question. 

As always, have a great day, a better week, and I look forward to talking with you on the next blog post, podcast, YouTube video, or wherever we have the pleasure of connecting!

Written by Ryan Morrissey

Founder & CEO of Morrissey Wealth Management

Host of the Retire with Ryan Podcast