We spend more as we age to take care of ourselves, disbursing money for everything from doctor visits to exercise classes, to vitamins, to assisted living apartment fees.
Some of these items are tax deductible, and the proper tally when you fill out your taxes can save you considerable sums of money.
The first rule is that you may deduct spending in excess of 10% of your adjusted gross income. People 65 and older get a break. They can deduct spending above 7.5%.
Let’s assume your adjusted gross income is $57,000 for the year 2013, and you are 65 years old. And you spent $6,500 for medical costs. 7.5% of your AGI is $4,275. Subtract that from $6,500, and you can deduct $2,225 from your federal income taxes.
That was the easy part. The trick is in figuring out everything that is deductible and making sure you tally it.
-All payments to doctors, dentists, chiropractors, psychologists, and other medical providers are deductible.
-Payments to hospitals, rehabilitation facilities and nursing homes are deductible.
-All prescription medications are deductible.
And now we move away from the obvious and easy stuff-the medical bills-to the spending that helps your health but isn’t obvious.
If you need to modify your house for medical purposes, such as installing extra-wide doorways to accommodate wheelchairs, or building a ramp instead of stairs to make it easier to enter and leave the home, the construction costs will be fully deductible.
But some substantial improvements may add to the retail value of your home, and won’t be fully deductible. Here is an example from the IRS for a homeowner: “You have a heart ailment. On your doctor’s advice, you install an elevator in your home so that you will not have to climb stairs. The elevator costs $8,000. An appraisal shows that the elevator increases the value of your home by $4,400.”
The IRS work sheet says you subtract $4,400 from $8,000, and your deduction is $3,600.
An example for a renter:
“John has arthritis and a heart condition. He cannot climb stairs or get into a bathtub. On his doctor’s advice, he installs a bathroom with a shower stall on the first floor of his two-story rented house. The landlord did not pay any of the cost of buying and installing the special plumbing and did not lower the rent. John can include in medical expenses the entire amount he paid.”
Now, the even more complex situations. You move into an assisted living facility, one offering a variety of methods of care. When you are healthy and fully mobile, you live in the apartment wing of the facility. If your health deteriorates and you cannot care for yourself, you move into a wing with a higher level of care, with someone to help you bathe and dress. If your condition worsens yet more, you move into the nursing home wing of the facility.
You are paying a monthly fee for your residence. Or, some facilities require you to buy a lifetime membership. Either way, your deduction will be equal to the portion of spending linked to medical care.
The retirement facility calculates how much of its annual spending is devoted to medical care, and that percentage is the one you can deduct.
“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 IRS says. “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.”
Let’s say you pay $3,500 a month at Senior Acres. And the management figures that 25% of its budget goes for medical care. You can deduct 25% of your monthly payment, and for the year, your deduction would be $10,500.
If you have to travel away from home and stay in another city to receive medical care, you can deduct $50 a night for lodging.
Money you spend for a personal aide to care for you at home is deductible IF a doctor has ordered this as part of your treatment, and IF you need help with at least TWO of these activities of daily living: using the toilet, dressing, bathing, getting in and out of bed , eating, and [urinary] continence. Also, if you need an aide to provide “substantial supervision to be protected from threats to health and safety due to severe cognitive impairment.”
Premiums you pay for long-term care insurance (covering care at home or in a nursing home), and deductible according to the age of the taxpayer. Deductions for the annual cost of the policy are:
a. Age 40 or under – $350
b. Age 41 to 50 – $660
c. Age 51 to 60 – $1,310
d. Age 61 to 70 – $3,500
e. Age 71 or over – $4,370
