Offset Nursing Home Costs with Possible Tax Breaks

Alexandra Isdell, CPA, MAcc

If you have a parent entering a nursing home, taxes are probably the last thing on your mind. However, you should know that several tax breaks may be available to help offset some of the costs.

Medical expense deductions

The costs of qualified long-term care (LTC), such as nursing home care, may be deductible as medical expenses to the extent they, along with other qualified expenses, exceed 7.5% of adjusted gross income (AGI). However, keep in mind that the medical expense deduction is an itemized deduction, which saves taxes only if total itemized deductions exceed the applicable standard deduction.

Amounts paid to a nursing home are deductible as medical expenses if a person is staying at the facility principally for medical, rather than custodial care. Also, for those individuals, only the portion of the fee that’s allocable to actual medical care qualifies as a deductible expense.

If the individual is chronically ill, all qualified LTC services are deductible. Qualified LTC services are those required by a chronically ill individual and administered by a licensed health care practitioner. They include diagnostic, preventive, therapeutic, curing, treating, mitigating and rehabilitative services, and maintenance or personal-care services.

For someone to qualify as chronically ill, a physician or other licensed health care practitioner must certify them as unable to perform at least two activities of daily living (ADLs) for at least 90 days due to a loss of functional capacity or severe cognitive impairment. ADLs include eating, transferring, bathing, dressing, toileting and continence.

Qualifying as a dependent

If your parent qualifies as your dependent, you can add medical expenses you incur for them to your own medical expenses when calculating your medical expense deduction. We can help with this determination.

If you are not married and you meet the dependency tests for your parent, you may qualify for head-of-household filing status, which has a higher standard deduction and lower tax rates than filing as single. You may be eligible to use this status even if the parent for whom you claim an exemption does not live with you.

Selling your parent’s home 

In many cases, a move to a nursing home also means selling the parent’s home. Fortunately, up to $250,000 of gain from the sale of a principal residence may be tax-free. To qualify for the $250,000 exclusion, the seller must generally have owned the home for at least two years of the five years before the sale.

Also, the seller must have used the home as a principal residence for at least two of the five years before the sale. However, there is an exception to the two-of-five-year use test for a seller who becomes physically or mentally unable to care for themself during the five-year period.

LTC insurance

Perhaps your parent is still in good health but is paying for LTC insurance (or you are paying LTC insurance premiums for yourself). If so, be aware that premiums paid for a qualified LTC insurance contract are deductible as medical expenses (subject to limits) to the extent that they, when combined with other medical expenses, exceed the 7.5%-of-AGI threshold. Such a contract does not provide payment for costs covered by Medicare, is guaranteed renewable and does not have a cash surrender value.

The amount of qualified LTC premiums that can be included as medical expenses is based on the age of the insured individual. For example, for 2023 the limit on deductible premiums is $4,770 for those 61 to 70 years old and $5,960 for those age 71 or over.

This is just a brief overview of tax breaks that may help offset nursing home and related costs. For more information or assistance, contact your ORBA advisor or Alex Isdell at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Wealth Management Services.

Trusts vs. LLCs: Protecting Your Assets from Lawsuits and Creditors

Azuwa Omietimi

All the estate planning in the world won’t do you much good if you have no assets to leave to your family. Protecting what you have is particularly important if your business, profession or personal activities expose you to frivolous lawsuits or creditor claims.

Two of the most effective asset protection vehicles are trusts and limited liability companies (LLCs). Each type of entity has advantages and disadvantages, so the right one for you depends on your circumstances and objectives.

Irrevocable legal arrangement

A trust is a legal entity you establish to hold assets such as cash, investments or real estate for the ultimate benefit of your spouse, children or other loved ones. The trust document designates one or more trustees and successor trustees to manage the trust. It also specifies the conditions under which the assets will be distributed to your named beneficiaries.

Generally, to protect your assets from creditors, the trust must be irrevocable, meaning you must relinquish most control over the assets it holds. You should also avoid naming yourself as a discretionary beneficiary, although that may be permissible in states that authorize domestic asset protection trusts (DAPTs). Another option is an offshore trust, which offers strong asset protection and may even allow you to access the assets down the road.

There are several advantages to trusts. For example:

• They are relatively inexpensive to set up and maintain;
• They are usually private — that is, they do not require any public filings; and
• Trust assets generally are exempt from probate.

The main disadvantage of trusts is that to provide asset protection they need to be irrevocable. That means you must give up control of the assets. Plus, protection from creditors ends after your beneficiaries take ownership of them.

Flexible business entity

An LLC is a business entity that combines the liability protection of a corporation with the flexibility and tax advantages of a partnership. To protect your assets, establish an LLC, transfer assets to the entity, and then gift or sell membership interests to your spouse, children or others.

The LLC structure facilitates a transfer of wealth while providing strong asset protection to you and the other members. Generally, the members’ personal creditors cannot effectively reach the LLC’s assets. Conversely, the LLC’s creditors cannot reach the members’ personal assets.

LLCs are generally more costly and time consuming to set up and maintain than trusts, and because they require public filings, some personal information may have to be disclosed. What’s more, avoiding probate may be more challenging (though still possible). However, LLCs provide asset protection while allowing you to maintain complete control over the assets by retaining a controlling interest in the entity. Plus, this protection can extend beyond your lifetime. When your loved ones take control, they continue to enjoy the liability protection provided by the LLC structure.

Related Read: LLCs: How Limited Is Your Liability?

Sooner the better

Asset protection strategies only protect you against unanticipated creditor claims that arise in the future. You cannot use them to avoid liability for existing or reasonably foreseeable claims. Federal and state fraudulent conveyance laws prohibit transfers of property (to a trust or LLC, for example) with the intent to hinder, delay or defraud existing or foreseeable future creditors. Also, certain obligations — such as taxes, alimony or child support — are difficult, if not impossible, to avoid.

Therefore, the sooner you implement an asset protection strategy the better. Discuss your situation and needs with your ORBA advisor.

For more information, contact Azuwa Omietimi at [email protected] 312.670.7444. Visit ORBA.com to learn more about our Wealth Management Services.