Tax Aspects of a Parent Entering a
Matters of whether amounts paid for long-term medical care including
amounts paid to the nursing home are deductible, whether insurance premiums covering the
cost of long-term care including nursing home expenses (for the part of the year before
your parent enters the nursing home) are deductible, and whether the gain on the sale of
your parent's home will qualify for the $250,000 exclusion are aspects which you should
consider in connection with your parent entering a nursing home and are discussed below.
Deductibility of long-term medical care services. The costs of qualified
long-term care, including nursing home care, are deductible as medical expenses to the
extent they, along with other medical expenses, exceed 7.5% of adjusted gross income.
Qualified long-term care services are necessary diagnostic, preventive, therapeutic,
curing, treating, mitigating, and rehabilitative services, and maintenance or personal
care services required by a chronically ill individual provided under a plan of care
presented by a licensed health care practitioner.
To qualify as chronically ill, an individual must be certified by a physician or other
licensed health care practitioner (e.g., nurse, social worker, etc.) as unable to perform
without substantial assistance at least two activities of daily living (eating, toileting,
transferring, bathing, dressing, and continence) for at least 90 days due to a loss of
functional capacity, or as requiring substantial supervision for protection due to severe
cognitive impairment (memory loss, disorientation, etc.). A person with Alzheimer's
Deductibility of premiums paid for qualified long-term care insurance.
Premiums paid for a qualified long-term care insurance contract are deductible as medical
expenses (subjects to an annual premium deduction limitation based on age, as explained
below) to the extent they, along with other medical expenses, exceed 7.5% of adjusted
gross income. A qualified long-term care insurance contract is insurance that provides
coverage only for qualified long-term care services, doesn't pay costs that are covered by
Medicare, is guaranteed renewable, and doesn't provide for a cash surrender value. A
policy isn't disqualified merely because it pays benefits on a per diem or other periodic
basis without regard to the expenses incurred during the specific payment period.
Qualified long-term care premiums are includible as medical expenses up to the following
dollar amounts: For individuals over 60 to 70 years old, the 2007 limit on deductible
long-term care insurance premiums is $2,950 ($2,830 for 2006), and for over 70, $3,680
($3,530 for 2006).
Deductibility of amounts paid to the nursing home. Amounts paid to a
nursing home are fully deductible as a medical expense if the principal reason that a
person stays at the nursing home is for medical, as opposed to custodial, etc., care. If a
person isn't in the nursing home principally to receive medical care, then only the
portion of the fee that is allocable to actual medical care qualifies as a deductible
medical expense. But if the individual is chronically ill (as defined above), all of the
individual's qualified long-term care services, including maintenance or personal care
services, are deductible.
Including medical expenses you pay for your parent as part of your deductible
medical expenses. If your parent qualifies as your dependent under the rules
discussed below, you can include any medical expenses you incur for your parent along with
your own when determining your medical deduction. If your parent doesn't qualify as your
dependent only because of the gross income or joint return test ((b) and (c), below), you
can still include these medical costs with your own.
Claiming a parent confined to a nursing home as a dependent. You may be
able to claim your parent as a dependent, thus qualifying for an exemption, even though
your parent is confined to a nursing home. To qualify, (a) you must provide more than 50%
of your parent's support costs, (b) your parent must not have gross income in excess of
the exemption amount ($3,400 in 2007; $3,300 in 2006), (c) your parent must not file a
joint return for the year, and (d) your parent must be a U.S. citizen or a resident of the
U.S., Canada, or Mexico. Since your parent is related to you, your parent can qualify as
your dependent even though your parent doesn't live with you, provided the support and
other tests mentioned above are met. Amounts you pay for qualified long-term care services
required by your parent and eligible long-term care insurance premiums, discussed above,
as well as amounts you pay to the nursing home for your parent's medical care, are
included in the total support you provide. If the support test ((a) above) can only be met
by a group (you and your brothers and sisters, for example, combining to support your
parent), a multiple support form can be filed to grant one of you the exemption, subject
to certain conditions.
Qualification for head-of-household filing status. If you aren't married
and you are entitled to claim a dependency exemption for your parent, you may qualify for
the head-of-household filing status, which is more favorable than the single filing
status. You may be eligible to file as head of household even if the parent for whom you
claim an exemption doesn't live with you. In order to qualify for head-of-household
status, generally you must have paid more than half the cost of maintaining a home for
yourself and a qualifying relative for more than half the year. In the case of a parent,
however, you may be eligible to file as head of household if you pay more than half the
cost of maintaining a home that was the principal home for your parent for the entire
year. Thus, if your parent is confined to a nursing home, you are considered to be
maintaining a principal home for your parent if you pay more than half the cost of keeping
your parent in the nursing home.
Qualification of gain on sale of your parent's home for $250,000 exclusion.
If your parent sells his or her home, up to $250,000 of the gain from the sale may be
tax-free. In most cases, the seller, in order to qualify for this $250,000 exclusion, must
have (a) owned the home for at least two years out of the five years before the sale, and
(b) used the home as his or her principal residence for at least two years out of the five
years before the sale. However, there is an exception to the two-out-of-five-year use test
under (b) if the seller becomes physically or mentally unable to care for him or herself
at any time during the five-year period.
Your parent can qualify for this exception to the use test if, during the five-period
before the sale, your parent (1) becomes physically or mentally unable to care for him or
herself, and (2) your parent owned and lived in the home as his or her principal residence
for a total of at least one year. Under this exception, your parent is treated as using
the home as his or her principal residence during any time during the five-year period in
which he or she owns the home and resides in any facility (including a nursing home)
licensed by a state or political subdivision to care for an individual in your parent's
Exclusion for payments under life insurance contracts. If your parent is
terminally or chronically ill and is insured under a life insurance contract, he or she
may be able to receive tax-free payments (accelerated death benefits or so-called “viatical”
payments) while living. Any lifetime payments received under a life insurance contract on
the life of a person who is either terminally or chronically ill are excluded from gross
income. A similar exclusion applies to the sale or assignment of a life insurance contract
to a person who regularly buys or takes assignments of such contracts and meets other
qualifying standards. These lifetime payments could be used to help pay the costs of your
parent's nursing home.
Reverse mortgage as alternative to nursing home. It is often desirable
for an elderly person to remain in his or her own home with proper in-home care rather
than entering a nursing home. A reverse mortgage loan may make this a feasible alternative
to a nursing home. Many states permit a reverse mortgage loan, which is designed to permit
elderly persons with limited income to remain in their homes by borrowing against the
value of their homes. Typically, a bank commits itself to a principal amount based on the
appraised value of the property, which is loaned to the borrower in installments over a
period of months or years. The monthly installments can be used to help pay for the upkeep
of the home and for in-home care. Repayment of the loan is due when the principal amount
has been fully paid to the borrower, or the residence that secures the loan is sold, or
the borrower dies or ceases to use the home as his principal residence. The loan agreement
may provide that interest will be added to the outstanding loan balance monthly as it
accrues. However, interest isn't deductible by the borrower at that time. Interest isn't
deductible until it is actually paid.