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Helping Your Clients in a Difficult Time: The Tax Treatment for Alzheimer’s

Elderly ladyMany CPA financial planners have had the heartbreaking experience of seeing a client, or a client’s loved one, end up in an assisted living, skilled nursing or memory care facility due to cognitive decline. Although this is a difficult time for the patient’s family, CPA planners and tax practitioners are in a unique position to help them understand the tax treatment and possible deductions for expenses incurred at these facilities.

Alzheimer’s, a type of dementia and a degenerative disease that leads to death, is one of the most common examples of cognitive decline. At advanced stages, the patient can no longer live safely on his or her own, and may have to move into a care facility. If certain conditions are met, the cost of living at the facility, including room and board, is deductible as a healthcare expense. For those aged 65 and older, medical expenses must exceed 7.5% of adjusted gross income in 2015 and 2016 in order to be deductible. The threshold increases to 10% in 2017.

According to IRS Publication 502, qualified long-term care services include “… maintenance and personal care services that are 1) required by a chronically ill individual, and 2) provided pursuant to a plan of care prescribed by a licensed healthcare practitioner.”

A chronically ill individual includes someone with severe cognitive impairment needing “substantial supervision to be protected from threats to health and safety.” In addition, a taxpayer may “include in medical expenses the cost of meals at a hospital or similar institution if a principal reason for being there is to get medical care.”

Example: Tom, age 72, was diagnosed with severe cognitive problems by a licensed psychologist performing a neuropsychological test. Single, with no relatives, Tom was placed under court-ordered guardianship and moved into an assisted living facility for his own safety. His primary care doctor provided the plan of care. The entire cost of Tom’s stay at the facility was deductible as a healthcare expense on his federal tax return.

What most families of Alzheimer’s patients do not realize is that the cost of staying at the facility is a tax-deductible expense. In some cases, the facility may send a letter to family members and guardians providing general information on the deductibility of the expense. The facility also usually cautions the family to seek out the advice of a tax practitioner.

 

That’s where your role as a CPA financial planner or tax practitioner comes in. You can help your clients understand the tax treatment for these types of expenses because a favorable tax treatment can help reduce the overall costs of care.

For more information, refer to IRS Publication 502: Medical and Dental Expenses (2014) and IRS Notice 97-31, letter to Rep. Edward Markey (now Senator) from Kimberly L. Koch, IRS Senior Technician Reviewer.

PFP Section members, including CPA/PFSTM credential holders, have access to a robust suite of retirement planning resources, including my The CPA’s Guide to Financing Retirement Healthcare—a handbook explaining the basic rules of Medicare and paying for long-term care—along with planning tools and appropriate adviser responses to commonly asked client questions. Non-members can download a free excerpt of the guide.

James Sullivan, CPA/PFS, Core Capital Solutions, LLC. James has been a personal financial planner and investment manager for almost 30 years. His practice focuses primarily on seniors—those about to retire or those who have already retired. He has written more than 60 articles on a variety of retirement planning topics and also writes a monthly column on aging for the AICPA newsletter, CPA Insider

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