Tax Benefits of Entrance Fee Life Plan Communities
When evaluating your senior living options, it can be easy to start with whether or not the community has an entrance fee. However, the reality is that this only tells part of the story. Other benefits to consider include services and amenities, location, type of community, available contract types and what the various fees cover. Something else important to consider that you might not already know is that part of your entrance fee and monthly fee could qualify as a tax deduction.
The Difference a Contract Makes
Before starting any financial discussion, it’s important to have an overview of the different types of contracts senior living communities offer and the benefits of each. Here’s a breakdown of your options:
Type A (also referred to as Life Care)
According to the Department of Health and Human Services, 7 out of 10 adults will need long-term care at some point for an average of 3 years. At a community with a Type A or Life Care contract, like Freedom Plaza, you pay an entrance fee, which is often partially refundable to you or your estate, and a monthly service fee. Type A contracts typically ensure priority access to all levels of care the community offers at predictable, below-market rates. If you or your spouse need different levels of care, you’ll often pay just one monthly fee plus any additional meals needed. If you ever need long-term health care, having a Life Care contact can save you tens of thousands of dollars.
Type B (also called modified plan)
Communities offering this contract type offer housing and services and amenities, and, just like at a Type A community, you’ll pay a one-time entrance fee and a monthly service fee. However, the cost of higher levels of care is very different. As part of your entrance fee, you may receive care in one of two ways: 1) a limited number of free days of health care, with additional days billed at per diem market rates, or 2) an ongoing, minimally discounted rate. If you and your spouse need different levels of care, you may end up paying two monthly service fees to cover those two different care levels.
Type C (also known as fee-for-service)
Housing and services are provided, and the entrance fee and monthly service fee tend to be much lower than with the other two contract types. You may have access to care, but it will be charged at market rates, which are typically much higher than a Type A or B contract. Also, if you live in independent living but need care on a short-term basis, you may be required to pay your monthly service fee for your independent living residence, plus the costs of housing and the health care you receive.
Rental
Rental communities usually charge you rent by the month. Some rental communities may have year-long leases, while others might literally be month-to-month obligations. People who choose rentals may prefer the flexibility, however, rental monthly service fees may be higher than what you’d pay in a comparable entrance fee community. Many rental contracts don’t offer on-site care or provide you with priority access to health care services. If you ever do need care, you’ll have to pay for it at full market rates, while also covering your monthly rent.
Is Senior Living Tax Deductible?
For any part of your entry fee and monthly fee to be tax deductible, a portion of those fees must be accounted for by the community as a pre-paid healthcare expense. (Which is always the case with a Life Care contract.) It’s also important to know that only non-refundable portions of the entry fee can be used for tax deduction purposes. Any refundable portion of the entry fee would not be counted in the formula to determine the deductible amount. If you deduct any portion of the entry fee that is eventually refunded via a “return of capital contract,” then the refundable portion could later be taxable as income.
It’s important to keep in mind that deductions for your initial entrance fee and the ongoing monthly fees are available on a “use it or lose it” basis. In other words, you will need to plan out your taxable income every year to ensure that you receive the maximum benefit from these substantial senior living tax deductions. Also, if your children pay the entry fee, or some portion of it, they could be entitled to take a tax deduction.
Check with Your Tax Professional
As the tax laws are always changing, it’s important to check with a qualified tax professional to help you analyze your unique tax situation.
The Benefits of Freedom Plaza Go Well Beyond Tax Breaks
Freedom Plaza is a Type A/Life Care community where you lock in predictable rates for future care and get tax savings right away with your entrance and monthly fees. If you have questions about when is the best time to move into independent living, want to hear more about potential tax breaks or learn more about our lifestyle, use our Community Assistant chat feature or contact us here.
