Tax Aspects of a Parent Entering a Nursing Home

If you have a parent who may need to enter a nursing home in the near future, you may have questions about medical expenses, insurance, or other related issues. These matters and other tax aspects which you should consider in connection with your parent entering a nursing home are discussed below.

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 7.5% of adjusted gross income (AGI) for 2018.

Qualified long-term care services are necessary for diagnostic, preventive, therapeutic, curing, treating, mitigating, rehabilitative services, and maintenance or personal-care services required by a chronically ill individual (as certified by a physician or other licensed health-care practitioner) provided under a plan of care presented by a licensed health-care practitioner.

Premiums paid for a qualified long-term care insurance contract are deductible as medical expenses (subject to an annual premium deduction limitation based on age, as explained below) to the extent they, along with other medical expenses, exceed the %-of-AGI threshold. 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 but not over 70 years old, the 2018 limit on deductible long-term care insurance premiums is $4,160, and for those over 70, the 2018 limit is $5,200.

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.

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.

You may be able to claim your parent as a dependent, 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 ($4,150 for 2018), (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 if he or she doesn't live with you, provided the support and other tests are met.

Amounts you pay for qualified long-term care services required by your parent and eligible long-term care insurance premiums, 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 you aren't married and you're entitled to claim your parent as a dependent, you may qualify for the head-of-household filing status, which has a higher standard deduction and lower tax rates than the single filing status. 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're 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.

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.

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) 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.

If you wish to discuss these situations further, please contact us.