Are A Retirement Community’s Entrance Fee and Monthly Fee Tax Deductible?

With the new year upon us and Tax Day just beyond, the following is some basic information about potentially tax-deductible retirement community expenses. If you or a loved one are considering a move to a retirement community like The Highlands at Wyomissing®, it’s important to understand exactly what is, and is not, a related deductible expense. You of course don’t want to miss out on potential tax savings, nor do you want to incur tax penalties for taking unauthorized deductions.

Life plan communities or Continuing Care Retirement Communities (CCRCs) like The Highlands offer independent living residences as well as services spanning a continuum of care. At The Highlands these services include personal care, memory support, and nursing care. Some CCRC fees are tax deductible because a sizable portion of a new resident’s entry fee and monthly service fee is considered a “pre-paid medical expense.” Importantly, this deduction may apply even when a CCRC resident is not currently receiving any healthcare services from the community. In other words, even when a Highlands resident is living independently, they may still be able to take advantage of this deduction.

Many older adults are not fully aware of the tax deductions that may be available to residents of The Highlands and other CCRCs. However, it is essential to understand that the availability and size of any CCRC tax deduction depend in large part on three factors:

The type of CCRC residency contract the resident has with the community
The specific entry and/or monthly service fees assessed by the community
Whether you itemize or take the standard deduction on your taxes. (The deduction is not applicable if you take the standard deduction.)

Tax deductions based on CCRC contract type

It is important to understand the various types of residency contracts offered by CCRCs in order to determine the potential tax deductibility of entry and/or monthly service fees.

Lifecare contracts (Type A)

A lifecare contract, such as the Type A contract at The Highlands, requires higher entry and monthly service fees, but in return, healthcare services, including personal care, memory support and nursing care, are covered with little or no increase in cost over time. This offers long-term cost predictability by essentially prepaying for most future care needs. The trade-off is that residents could end up paying for services they never use. For couples, the benefit of lifecare may be even greater because both spouses could save money on the cost of care.

Tax implications: Typically, a lifecare contract such as The Highlands Type A Contract offers the most substantial deductions, as a significant portion of the fee is considered prepaid medical expenses.

Modified contracts (Type B)

Similar to the Type A contract, the modified/Type B contract at The Highlands offers some future healthcare coverage, i.e. 60 days of personal care or memory support and 60 days of nursing care. After those benefits are used, the resident pays the full market rate for care services.

Terms vary with Type B contracts; for example, some contracts combine discounts with allotted days, and it’s important for couples to understand how care-related benefits apply to each person.

Tax implications: Modified/Type B contacts can also provide deductions for prepayment of healthcare expenses, though the deduction is usually at a lower rate than Type A contracts.

Fee-for-service contracts (Type C)

Fee-for-service contracts, which are not offered at The Highlands, have lower entry and monthly service fees but require residents to pay full market rates for personal care, memory support or nursing care if needed. Some offer à la carte options for services in independent living. While there’s no upfront payment for future care, residents bear the full financial risk of long-term care costs.

Tax implications: Deductions for prepayment of healthcare expenses are less common and can be limited because nursing care expenses are paid at the time of service.

Rental contacts

Rental CCRC contracts, also not offered at The Highlands, typically have no entry fee or only a small community fee, with month-to-month agreements. Monthly service fees are generally higher, and residents pay full market rates for healthcare. These contracts often don’t guarantee priority access to care services, and lifetime costs can exceed those of entry-fee communities, depending on the level and length of care needed.

Tax implications: Deductions for prepayment of healthcare expenses are less common and can be limited because nursing care expenses are paid at the time of service.

Key considerations for retirement community tax deductions

While a comprehensive review of tax deductions related to retirement communities (and CCRCs like The Highlands) is important for all residents and future residents, the following are important points to keep in mind:

Current utilization of healthcare services is not required in order to qualify for a tax deduction. Because a portion of the entry fee and/or monthly service fee is considered prepayment for future healthcare costs, a resident of The Highlands could be eligible for a medical expense tax deduction even if they are living independently and not actively receiving healthcare services.
Only the non-refundable portion of an entry fee qualifies for a medical expense deduction. If a previously deducted portion of the entry fee is later refunded, it may be considered taxable income in the year the refunded amount is received. It’s best to only take the deduction as it applies to the non-refundable part of the entry fee.
Under current IRS guidelines (2024) regarding medical expense thresholds, individuals can deduct unreimbursed medical expenses that exceed 7.5% of their adjusted gross income (AGI). This applies regardless of age as of 2024. Therefore, any portion of entry or monthly service fees considered a prepaid medical expense may be combined with other qualifying medical costs to determine total deductible expenses.
Tax deductions are most common for residents with Type A (lifecare) and Type B (modified) contracts, as these typically include a healthcare expense prepayment component. It is much less common for residents under a Type C (fee-for-service), to qualify for a limited deduction.
Each CCRC may use a different methodology, often developed by its financial officer or auditor, to determine what portion of entry and/or monthly service fees is attributable to medical care. As a rough estimate, one might typically expect the deduction to be around 30% to 40% of the non-refundable entry fee and monthly service fees, but this can vary significantly by community.
If a third-party (such as adult children or others) contributes their own money to pay a portion of a CCRC resident’s entrance fee, the third-party may also be eligible to claim a tax deduction. However, eligibility depends on factors such as the level of financial support provided and whether the resident qualifies as a dependent of the third party.

Please note that tax laws can and do change. It is therefore essential to consult an experienced CPA or tax professional or to refer to official IRS publications for the most current information.