Stretching income to afford living in a retirement community can be tricky for some retirees. There are some potential tax disadvantages to consider. Here are four important considerations to work through before you move.
1. Not All Expenses Are Deductible:
If you are living in a retirement community for personal rather than medical reasons, many expenses will not be tax deductible. Food and board are only deductible if you need the care for medical reasons.
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2. Your Long-Term Care Insurance May Require Taxes:
After you enter a retirement community, you may start drawing from your long-term care insurance plan. According to the American Association for Long-Term Care Insurance
, your policy will issue a 1099 LTC at tax time for any draw-outs from your policy. This form will also list any payments made directly to your retirement community. Portions of these payments may be taxable as income.
3. Home Care Deductions May Not Apply:
There are several tax deductions for care in the home that are not going to be applicable in a retirement community setting. The IRS allows medical deductions
for the renovation of a home to accommodate a person with a disability. Costs of nursing-type help in the home can be deducted as medical expenses. The person you hire for these services does not need to be a nurse, but simply someone providing nursing-type services in the home setting.
4. Payments Toward Future Care Are Not Necessarily Deductible:
Some continuing care facilities allow residents not needing current medical care to pay for care that will be needed in the future. These payments are not necessarily deductible as medical expenses. A portion of your monthly fees should be allocated toward medical expenses. The American Seniors Housing Association reports
this is the deductible portion.
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Keep in mind that tax deduction limits change as you age. Be careful to watch your limits and make sure you are getting the best tax benefit for your situation.
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