Tax-efficient retirement planning should not overlook the benefits of Continuing Care Retirement Communities (CCRC). CCRCs allow retirement age seniors to provide for their current living needs and plan for their future when medical assistance may be needed. Seniors entering a CCRC typically sign a Life-Care agreement, which provides for housing and health services while they are healthy and active. This agreement provides a way for seniors to plan for their retirement, housing, and health services for the remainder of their life with significant tax benefits.
A typical CCRC may provide different types of living units, each of which provides a different level of medical or long-term care. Usually an entrance fee is required in the form of an immediate lump-sum payment and then monthly fees are paid thereafter. The lump-sum payment and monthly fees entitle the resident to certain lifetime medical and long-term care services, in addition to housing in the CCRC. A taxpayer generally may deduct a portion of these fees as medical expenses. The monthly fees generally are higher than rents paid for a comparable house or apartment. However, as much as 30% or more of the fees may be tax deductible as a medical expense.
Medical expenses are only deductible for taxpayers who itemize deductions. In addition, the deductible portion is limited to the amount that exceeds 7.5% of your Adjusted Gross Income (AGI) in 2012. Starting in tax year 2013, the threshold will increase to 10% of AGI, thanks to the affordable care act. If you are age 65 (before year end) or older, the 7.5% threshold applies through 2016. Seniors age 65 or older who are considering a CCRC should do so before 2016 to maximize the deductible portion of the entrance fee.
The first year deduction could be significant. Careful tax planning is needed to take full advantage of the deduction. Roth conversions may be advisable for taxpayers in low income situations. Upper income taxpayers will want to employ strategies to reduce AGI in order to maximize the medical deduction.