This is a follow-up to a thread that started 23 years ago and a question that wasn’t quite covered by that thread.

My client, a relatively healthy 69-year old single woman jointly owned a condominium with her “significant other” who is 10 years older and has a few health issues. He is not my client. They both moved into two separate, neighboring units in one of
our local assistant living facilities. (They plan to jointly transfer into a two-bedroom unit when one becomes available in the future.)

She is in an “Independent Living Unit.” Her entry fee in 2022 was $245,000 (rounded) and her monthly fee is $3,400 (rounded) – over $40,000 annually. The facility’s accounting firm annual audit determined that, based on annual costs, 35% of
patient fees are allocated to medical care. The remainder of the fees is allocated to routine housing expenses.

Her personal medical expenses in 2022 were minimal and consisted primarily of Medicare and other health insurance premiums and routine visits to her primary care physician, dentist, and ophthalmologist and prescription medications. In 2022, she needed
almost none of the in-house medical services availability at the facility.

I assume only medical costs actually paid in 2022 can be deducted in 2022 and the calculated 35% allocated rate of medical costs is informational but does not allow her to automatically deduct 35% of her entry and monthly fees (35% x $245,000 = $85,750
and 35% x $40,000 = $14,000)?

Does the unused portion of fees allocated to medical expenses in 2022 carry forward and remain available for deduction in future years or is it lost in its entirety?

Thanks.

Michael Bratt
AFSP
Arlington, VA











On Sunday, April 9, 2000 at 3:00:00 AM UTC-4, M. L. Murrell wrote:

Colin Whipple wrote:

Any further guidance? I would appreciate any code
references that you may have.

The following is from the regulations under Sec. 213:

Colin, Thank you for the reference
(v) The cost of in-patient hospital care (including the

cost of meals and lodging therein) is an expenditure for
medical care. The extent to which expenses for care in an
institution other than a hospital shall constitute medical
care is primarily a question of fact which depends upon the
condition of the individual and the nature of the services
he receives (rather than the nature of the institution). A
private establishment which is regularly engaged in
providing the types of care or services outlined in this
subdivision shall be considered an institution for purposes
of the rules provided herein.

I would read this as meaning that an institution does NOT
have to be a skilled nursing facility, as one poster had
previously thought.

In general, the following
rules will be applied: 1.213-1(e)(1)(v)(a) Where an
individual is in an institution because his condition is
such that the availability of medical care (as defined in
subdivisions (i) and (ii) of this subparagraph) in such
institution is a principal reason for his presence there,
and meals and lodging are furnished as a necessary incident
to such care, the entire cost of medical care and meals and
lodging at the institution, which are furnished while the
individual requires CONTINUAL MEDICAL CARE, shall constitute
an expense for medical care.

SNIP
The upper case above is my alteration. This seems to be
indicating to me that "Assisted Living" services that do not
require CONTINUAL MEDICAL CARE such as the case with most
"Assisted Living" facilities would not qualify for meals and
lodging as a medical deduction. This particular facility
has only "medical assistants" that help administer
medication, make beds, help with cooking, etc as needed, and
not necessarily on a day to day basis. Only if the client
needs the help that day. It is very individualized. The
director told me there is no RN, LPN, or MD on the payroll.
Am I being too strict to quiz the deductibility of "Assisted
Living" expenses? There is no doubt that this client and
most all of the tenants at the Assisted Living facility need
help with some form(s) of daily living. Otherwise the great
majority of them would not be there. But the code seems to
be biased toward a "nursing home" situation. The fact that
many of the tenants need periodic rather than continual
medical care seems very gray to me. If a tenant needed help
every day with his medications, would that be continual
medical care? What if the client need help making bed or
cooking his own meals every day? Is that continual medical
care?
As Assisted Living Facilities are popping up everywhere, I
am sure this is going to become more and more of an issue
with the IRS. Is there any case law out there? What about
PLR's?
In searching the archives I found a post by MBakercpa
(01/20/99) stating that an individual would qualify, for
long term care expenses, if they were unable to perform
(without substantial assistance) at least 2 activities of
daily living for at least 90 days due to a loss of
functional capacity. The post went on to state the TRA of
97 clarifies this to mean two out of five daily living
activities.
Is this a PLR? What are the five daily living activities in
the IRS's eyes?
Marie L. Murrell, CPA

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On Sunday, March 19, 2023 at 12:30:52 PM UTC-5, Michael Bratt wrote:

I assume only medical costs actually paid in 2022 can be deducted in 2022 and the calculated 35% allocated rate of medical costs is informational but does not allow her to automatically deduct 35% of her entry and monthly fees (35% x $245,000 = $85,750

and 35% x $40,000 = $14,000)?

I agree with both statements above.

In assisted living situations, the key IRS phrase for identifying whether a medical expense can be added to Schedule A appears to be "chronically ill." The latter phrase appears at many sites.

From https://www.irs.gov/publications/p502:

"Chronically ill individual.

An individual is chronically ill if, within the previous 12 months, a licensed health care practitioner has certified that the individual meets either of the following descriptions:

1.
The individual is unable to perform at least two activities of daily living without substantial assistance from another individual for at least 90 days, due to a loss of functional capacity. Activities of daily living are eating, toileting, transferring,
bathing, dressing, and continence.

2.
The individual requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment."

A couple of the many sites helping people to understand this: https://seniorservicesofamerica.com/blog/are-senior-living-expenses-deductible/

https://cascades-verdae.com/blog/is-assisted-living-tax-deductible/

My take is that a tax preparer is often going to be stuck making a judgment call here. Said call is hopefully defensible should the IRS come knocking at the taxpayer's door.

I would hope tax preparers weigh the cost of their time in researching the details against the tax benefit to the client.

Does the unused portion of fees allocated to medical expenses in 2022 carry forward and remain available for deduction in future years or is it lost in its entirety?

I say no way. Internal Revenue Service publications (and no doubt the IRC) are clear that only medical expenses for 2022 can be counted on Schedule A.

I am just a puny VITA-qualified tax preparer of several years experience. In many situations I feel the complexity of the tax code now forces many VITA sites to make a judgment call: How far into the IRC weeds can they expect minimally trained volunteers
to go while still helping as many people (hopefully lower and middle income people in particular) as possible, sparing them the cost of paying someone? What a miserable example we set for taxpayers who want to believe the government is fair to them, when
it comes to taxes, but who often cannot confirm the government is.

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In a private email, Michael pointed out this section of IRS Pub 502:

Lifetime Care—Advance Payments
You can include in medical expenses a part of a life-care fee or “founder's fee” you pay either monthly or as a lump sum under an agreement with a retirement home. The part of the payment you include is the amount properly allocable to medical care.
The agreement must require that you pay a specific fee as a condition for the home's promise to provide lifetime care that includes medical care. You can use a statement from the retirement home to prove the amount properly allocable to medical care. The
statement must be based either on the home's prior experience or on information from a comparable home.

A few IRS Rev. Rulings exist on the point as well.

Hence for one, a tax preparer may see a client's statement from an assisted living facility that speaks of "life-care fees," paid either monthly or as part of the founder's fee, that may be deductible on Schedule A.

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On Monday, March 27, 2023 at 8:12:26 AM UTC-7, [email protected] wrote:

In a private email, Michael pointed out this section of IRS Pub 502:

Lifetime Care—Advance Payments
You can include in medical expenses a part of a life-care fee or “founder's fee” you pay either monthly or as a lump sum under an agreement with a retirement home. The part of the payment you include is the amount properly allocable to medical care.

The agreement must require that you pay a specific fee as a condition for the home's promise to provide lifetime care that includes medical care. You can use a statement from the retirement home to prove the amount properly allocable to medical care.
The statement must be based either on the home's prior experience or on information from a comparable home.

A few IRS Rev. Rulings exist on the point as well.

Hence for one, a tax preparer may see a client's statement from an assisted living facility that speaks of "life-care fees," paid either monthly or as part of the founder's fee, that may be deductible on Schedule A.

Note that only the non-refundable component of a life care fee identified as medical care is deductible.

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