Amazingly, many people are unaware of a potentially massive income tax deduction that has been available since 1996. The entire cost – 100% – of home health care or care at an assisted living facility can potentially be deducted. For seniors who rely upon their IRA, 401(k) or other qualified retirement plan to cover their care costs, this can amount to thousands of dollars a year in tax savings. So how does this work? Let’s compare what happened with Mary with what occurred with her friend, Alice.
Mary, a widow with severe arthritis, commenced residency at Dirty Pines Pastures, an assisted living facility, where she receives needed help with her personal care needs and activities of daily living. Her savings largely consist of several Individual Retirement Accounts (IRA). Mary draws upon her IRA to help pay the $6,500 monthly cost at Dirty Pines and for some of her other expenses. Last year she withdrew a total of $80,000 from her IRA. Mary paid $8,500 of federal income tax, which further depleted her IRA.
Mary’s friend, Alice, joined Mary at Dirty Pines after sustaining a stroke that left Alice paralyzed and unable to walk. The cost of her care and other expenses forced Alice last year to withdraw $80,000 from her 401(k) retirement plan. Alice paid no federal income tax. Why? Because prior to filing her income tax return, Alice’s elder law attorney obtained from Alice’s physician a chronically-ill certification. Her tax preparer used this certification as the basis for including the full cost of Alice’s care at Dirty Pines as part of her itemized medical expense deduction.
Section 7702B of the Internal Revenue Code authorizes a “chronically-ill individual” to deduct the full cost of care at home or in a facility. This includes room and board and other expenses that fail to meet the criteria for a deductible medical expense under section 213. Many, perhaps most, accountants and other tax preparers are unaware of Section 7702B. George Vasiliadis, and attorney with the law firm of Vasiliadis Pappas Associates, notes that “the criteria for qualifying as a chronically-ill individual are subjective. With some friendly advocacy by us, we can persuade your doctor to sign off on this where he otherwise might not.”
Fortunately for Mary, after talking to Alice and finding out about the deduction, Mary contacted her elder law attorney, who filed an amended income tax return and obtained for Mary a full refund.
If you or a loved one are incurring substantial health care costs, contact the lawyers at Vasiliadis Pappas Associates to explore potential tax savings.
