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Deduct long-term care expenses on your tax return

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The exorbitant costs of long-term care can wreak havoc on your retirement savings. According to the US Department of Health and Human Services, about 27% of Americans who turn 65 this year will incur at least $ 100,000 in long-term care costs, while nearly 18% will need care costing more than $ 250,000. It is a difficult pill for most older people to swallow.

But if you need long-term care, you may be able to deduct some of the costs on your tax return. If you have purchased long-term care insurance to cover the costs, you may also be able to deduct some of your premiums. Since retirement planning includes long-term care, it’s important to understand how these tax deductions can help offset overall costs.

Long-term care costs. You can deduct unreimbursed long-term care costs as medical expenses if certain conditions are met. This includes eligible expenses for home services, assisted living facilities, and nursing homes.

First, long-term care must be medically necessary. These may be preventive, therapeutic, treatment, rehabilitation, personal care or other services. (See IRS publication 502 for a complete list of eligible services.) The cost of meals and accommodation in an assisted living or nursing home is included if your primary reason for attending is to seek care qualified medical professionals.

Care should also be for a person with a chronic illness and provided as part of a care plan prescribed by a licensed health care professional. A person is “chronically ill” if they cannot perform two or more activities of daily living, such as eating, bathing or dressing, without assistance for at least 90 days. This condition must be attested in writing within the last year. Anyone with severe cognitive impairment, such as dementia, is also considered a chronic disease if monitoring is necessary to protect their health and safety.

To claim the deduction, you must itemize the deductions on your tax return, which fewer people do since the standard deduction almost doubled by the tax reform law of 2017. In addition, itemized deductions for medical expenses are not allowed. only to the extent that they exceed 7.5% of your adjusted gross income.

A child of full age can claim a medical expense deduction on their own tax return for the cost of caring for a parent if they can claim the parent as a dependent.

Insurance premiums. The tax code also allows a limited deduction for certain long-term care insurance premiums. Like the deduction for long-term care services, this is an itemized deduction for medical expenses. Consequently, only premiums exceeding the threshold of 7.5% of the AGI are deductible. (The self-employed may be able to deduct premiums paid for long-term care insurance as an income adjustment without having to itemize them.)

The insurance policy itself must also meet certain requirements for the premiums to be deductible. For example, it can only cover long-term care services. This limitation means that the deduction “only applies to traditional long-term care policies”, not to “hybrid” policies that combine life insurance and long-term care benefits, says Jesse Slome, executive director of the American Association for Long-Term Care. Assurance.

The deduction is capped according to age. For 2021, the limit is $ 5,640 if you are over 70, $ 4,520 if you are between 61 and 70, and $ 1,690 if you are between 51 and 60. (For ages 41 to 50, it’s $ 850, and for those 40 and under, it’s $ 450.)

These deductions are generally not useful for people in their 50s or 60s. But Slome says deductions can be invaluable for people 70 and older.

Why? On the one hand, income tends to decline in retirement, so deductions may have a larger overall impact on tax liability. As you age, you’re also more likely to have medical expenses above 7.5% of the AGI — IRS data shows that two-thirds of all medical expense deductions are claimed by seniors. These deductions could push your total itemized deductions beyond the standard deduction amount. The chances of meeting the medical necessity requirements for the care expense deduction also increase with age, and the premium deduction limit stabilizes after age 70.

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