Tax aspect of a parent entering a nursing home.
Deductibility of long-term medical care services: The costs of qualified long-term care, including
nursing home care, are deductible as medical expenses to the extent they, along with other medical
expenses, exceed 10% of adjusted gross income in 2017 (7.5% in 2018).
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.). A
person with Alzheimer’s disease qualifies.
Deductibility of premiums paid for qualified long-term care insurance: Premiums paid for a
qualified long-term care insurance contract are deductible as medical expenses (subjects to an
annual premium deduction limitation based on age, as explained below) to the extent they, along
with other medical expenses, exceed 10% of adjusted gross income in 2017. 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 2017 limit on deductible long-term care
insurance premiums is $4,090, and for those over 70, $5,110.
Deductibility of amounts paid to the nursing home. Amounts paid to a nursing home are fully
deductible as a medical expense if the person is staying at the nursing home principally for medical,
rather than custodial, etc., care. If a person isn’t in the nursing home principally to receive medical
care, then only the portion of the fee that is allocable to actual medical care qualifies as a deductible
medical expense. But if the individual is chronically ill (as defined above), all of the individual’s
qualified long-term care services, including maintenance or personal care services, are deductible.
Including medical expenses you pay for your parent as part of your deductible medical
expenses. If your parent qualifies as your dependent under the rules discussed below, 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.
Claiming a parent confined to a nursing home as a dependent. 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 ($4,050 in 2016 and
2017, (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.
Qualification for head-of- household filing status. 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.
Exclusion of gain on sale of your parent’s home. If your parent sells his or her home, up to
$250,000 of the gain from the sale may be tax-free. In most cases, the seller, in order to qualify for
this $250,000 exclusion, must have (a) owned the home for at least two years out of the five years
before the sale, and (b) used the home as his or her principal residence for at least two years out of
the five years before the sale. However, there is an exception to the two-out- of-five- year use test
under (b) if the seller becomes physically or mentally unable to care for him or herself at any time
during the five-year period.
Your parent can qualify for this exception to the use test if, during the five-year period before
the sale, your parent (1) becomes physically or mentally unable to care for him or herself, and (2)
your parent owned and lived in the home as his or her principal residence for a total of at least one
year. Under this exception, your parent is treated as using the home as his or her principal residence
during any time during the five-year period in which he or she owns the home and resides in any
facility (including a nursing home) licensed by a state or political subdivision to care for an individual
in your parent’s condition.
Exclusion for payments under life insurance contracts. If your parent is terminally or chronically
ill and is insured under a life insurance contract, he or she may be able to receive tax-free payments
(accelerated death benefits or so-called “viatical” payments) while living. Any lifetime payments
received under a life insurance contract on the life of a person who is either terminally or chronically
ill are excluded from gross income. A similar exclusion applies to the sale or assignment of a life
insurance contract to a person who regularly buys or takes assignments of such contracts and
meets other qualifying standards. These lifetime payments could be used to help pay the costs of
your parent’s nursing home.
Reverse mortgage as alternative to nursing home. It is often desirable for an elderly person to
remain in his or her own home with proper in-home care rather than entering a nursing home. A
reverse mortgage loan may make this a feasible alternative. Many states permit a reverse mortgage
loan, which is designed to permit elderly persons with limited income to remain in their homes by
borrowing against the value of their homes.
Typically, a bank commits itself to a principal amount based on the appraised value of the property,
which is loaned to the borrower in installments over a period of months or years. The monthly
installments can be used to help pay for the upkeep of the home and for in-home care. Repayment
of the loan is due when the principal amount has been fully paid to the borrower, or the residence
that secures the loan is sold, or the borrower dies or ceases to use the home as his principal
residence.
The loan agreement may provide that interest will be added to the outstanding loan balance monthly
as it accrues. However, the borrower can’t deduct this interest until it is actually paid.