If you have a parent entering a nursing home, you may not be thinking about taxes. But there are a number of possible tax implications. Here are five such considerations.
1. Long-Term Medical Care
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).
Qualified long-term care services are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating and rehabilitative services, and maintenance or personal-care services required by a chronically ill individual that is provided under care administered by a licensed healthcare practitioner.
To qualify as chronically ill, a physician or other licensed healthcare practitioner must certify an individual as unable to perform at least two activities of daily living (eating, toileting, transferring, bathing, dressing, and continence) for at least 90 days due to a loss of functional capacity or severe cognitive impairment.
2. Long-Term Care Insurance
Premiums paid for a qualified long-term care insurance contract are deductible as medical expenses (subject to limitations explained below) to the extent they, along with other medical expenses, exceed the percentage-of-AGI threshold. A qualified long-term care insurance contract covers only qualified long-term care services, does not pay costs covered by Medicare, is guaranteed renewable, and does not have a cash surrender value.
Qualified long-term care premiums are includible as medical expenses up to certain amounts. For individuals over 60 but not over 70 years old, the 2021 limit on deductible long-term care insurance premiums is $4,520, and for those over 70, the 2021 limit is $5,640.
3. Nursing Home Payments
Amounts paid to a nursing home are deductible as a medical expense if a person is staying at the facility principally for medical, rather than custodial care. If a person is not in the nursing home principally to receive medical care, only the portion of the fee that is allocable to actual medical care qualifies as a deductible expense. But if the individual is chronically ill, all qualified long-term care services, including maintenance or personal care services, are deductible.
If your parent qualifies as your dependent, you can include any medical expenses you incur for your parent along with your own when determining your medical deduction.
4. Head-of-Household Filing Status
If you are not married and you meet certain dependency tests for your parent, you may qualify for head-of-household filing status, which has a higher standard deduction and lower tax rates than single filing status. You may be eligible to file as head of household even if the parent for whom you claim an exemption does not live with you.
5. The Sale of Your Parent’s Home
If your parent sells their home, up to $250,000 of the gain from the sale may be tax-free. To qualify for the $250,000 exclusion, the seller must generally have owned the home for at least two years out of the five years before the sale, and used the home as a 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 if the seller becomes physically or mentally unable to care for themself during the five-year period.
These are only some of the tax issues you may deal with when your parent moves into a nursing home. Contact us if you need more information or assistance.