Here's a little-known way your choice of retirement residence can lead to huge tax deductions. First, you move into a continuing-care retirement community (CCRC). Let's say it has an entry fee of $200,000 and a monthly fee of $5,000. Depending on where it's located, you can deduct $50,000 to $200,000 of the entry fee in the year you move in, and $3,000 or more of your monthly fees every year afterward.
Here's a little-known way your choice of retirement residence can lead to huge tax deductions.
First, you move into a continuing-care retirement community (CCRC). Let's say it has an entry fee of $200,000 and a monthly fee of $5,000. Depending on where it's located, you can deduct $50,000 to $200,000 of the entry fee in the year you move in, and $3,000 or more of your monthly fees every year afterward.
You'll need some serious paperwork, in particular, a financial statement from your CCRC advising you of the portions of fees that accrue for medical care.
Residents deemed chronically ill in assisted-living units, as well as nursing-care residents, can deduct even more - up to 100 percent of their monthly fees, tax professionals say.
Why the tax breaks?
Because continuing-care facilities offer medical care as part of your contract. Unlike fee-for-service, the medical care is built into the community. The Internal Revenue Service considers so-called life care to be a medical expense, hence the tax deduction for portions of your up-front entry fee and ensuing monthly fees.
Because deductions vary state to state, consult with a tax adviser. Keep in mind that medical expenses must still exceed 7.5 percent or 10 percent of adjusted gross income (depending on your age) before any tax benefit is realized.
Deductions also vary by facility, and often there is no clear methodology on how the percentages are determined, so ask your accountant for guidance.
At one CCRC, a portion of your entrance fee (ranging from 30 percent to 40 percent) could be deductible, plus 30 percent to 45 percent of the monthly fees, says David L. Zalles, a certified public accountant in Blue Bell.
At another, Zalles says, if you have a letter from your doctor saying you can't perform the "activities of daily living," or have diminished mental capacity to the extent that you may harm yourself or others, then 100 percent of the entrance fee and monthly fees may be deductible.
Other ways to reduce your tax bill at a CCRC?
Convert a traditional IRA to a Roth IRA the year you move into one, says Sarah Costa, a tax adviser with Brandywine Wealth Management in New London Township. Then use the CCRC deduction to offset the IRA taxes.
She gives seminars to new residents of Freedom Village Retirement Community in Coatesville and advises them to capitalize on the deduction.
"It seems like this is too good to be true, but it's true," Costa says.
"The year you settle on your residence is the tax year you get the big deduction," she says.
As a bonus, Costa adds, "the same year, they liquidate a large IRA and convert to a Roth, and end up paying little or no taxes. Their savings then continue to grow in a Roth account tax-free."
John Brunner, director of financial services at the nationwide chain Brookdale Senior Living, confirms that the deductions for new residents can start at about 50 percent of the purchase price and entry fee, and 40 percent of ongoing monthly fees.
"If you live in an apartment and pay $3,000 a month, or $36,000 a year, then you can write off about $14,400, or 40 percent, as a medical expense" in a typical year, Brunner says, assuming you have life care as part of your contract.
Buyers must be joining a continuing-care community, with different stages of care.
"It's like buying long-term care insurance. You get a life-care contract. That's a promise to pay or reduce the cost of care in the future," Brunner said.
Yet another idea?
Jeff Petty has a radical one that could allow more middle-class retirees to move into continuing-care retirement communities, also with potential tax benefits.
Petty, CEO of Hatboro-based Wesley Enhanced Living since 2003, convinced U.S. Rep. Mike Fitzpatrick (R., Pa.) to introduce the Medicare Residential Care Coordination Act of 2013, which would allow Petty to test his idea of building Medicare and Medicaid payments into CCRCs.
He wants to build new CCRCs that offer seniors lifetime health and housing benefits with existing Medicaid and Medicare programs.
"Payments from Medicare can provide the full range of services, such as inpatient and outpatient care, physician services, and prescription drugs," Petty says. "New residents would use their housing equity to pay the entrance fee. Residents would then use any remaining assets, as well as their income, to pay a monthly fee."
For residents whose assets can't cover entrance or monthly fees, there's the possibility of integrating HUD funding to subsidize CCRC housing costs.
"We want to do the right thing," Petty says. "I'm looking around and saying, 'What we're doing doesn't make sense. We could do better.' There may not be more money in that, but we'll see."