The demand for long-term care facilities in the United States continues to rise, along with the costs. Someone who turns 65 today has roughly a 70% chance of eventually requiring long-term care services, according to the latest data from the U.S. Department of Health and Human Services. Moreover, 20% of seniors will need it for longer than five years. However, not everyone will wind up in a traditional nursing home.
One option that's gaining momentum is the continuing care retirement community (CCRC). If you've researched this alternative for yourself or your loved ones, you understand that it requires a significant financial commitment. But taxpayers who itemize their income tax deductions may be able to deduct a portion of the costs as qualified medical expenses. Let's take a closer look.
CCRCs — also referred to as "senior living communities" and "life care communities" — allow residents to take advantage of varying levels of care within a single community. Residents may be required to enter into a lifetime contract with the CCRC.
Residents can dial up or scale back their service level based on their health care needs. The lowest level of care is independent living in a separate home or apartment. As the need for care increases, an individual can be transferred to an assisted-living facility or a skilled nursing facility on the campus. In-home care may also be available.
Most CCRCs provide health care services for residents. This may include on-site preventive care, such as immunizations, physical exams, nutrition counseling, exercise programs and physical therapy. Primary care physicians, specialists, diagnostic testing and various other health care services may also be offered in an on-site outpatient clinic or skilled nursing facility, or in the resident's home.
Other daily amenities typically include:
Residents pay extra for personal services, such as help with dressing and grooming, showers, toileting, managing prescriptions, and wheelchair assistance to move around the facility.
Recreational and social activities may also be available. For example, some facilities provide on-site religious services, gyms, spas, swimming pools, book clubs and game events. Many CCRCs offer day-trip opportunities for shopping, dining and entertainment.
Of course, the benefits of choosing a CCRC come with a hefty price tag. The resident typically pays a one-time entry fee and monthly fees thereafter in exchange for a place to live and on-site services. A percentage of the entry fee may be refundable based on a sliding scale that depends on the length of the resident's stay. CCRC costs vary significantly depending on location, the quality of the facilities, and the range of services and amenities. It's important to vet providers carefully — there's much more to consider than the price tag.
Federal tax breaks can help make CCRC more affordable for you and your family. If you itemize, you generally can deduct medical expenses not covered by insurance or paid from tax-advantaged accounts to the extent they exceed 7.5% of your adjusted gross income (AGI). Based on IRS guidance and a landmark U.S. Tax Court case, you may be able to claim itemized medical expense deductions for a portion of entry fees and monthly fees for costs incurred while living in a CCRC.
Under IRS Revenue Ruling 93-72, you must enter into a contractual lifetime care arrangement to claim current deductions for what amounts to prepaid medical care when you enter a CCRC. CCRC fees incurred while in skilled nursing status, including housing and meal costs, qualify for the medical expense deduction if the resident is there primarily to receive medical care. Fees for assisted living and independent living residents may be partially deductible.
If you or a loved one is in assisted living status in a CCRC without a contract for lifetime care, the entry fee is usually modest. Fees for eligible personal care services can be treated as medical expenses if the resident is classified as chronically ill and the personal services are provided under a care plan prescribed by a licensed health care practitioner.
An individual is considered chronically ill if, within the previous 12 months, a licensed health care practitioner has certified that he or she is unable to perform at least two activities of daily living (ADLs) without substantial assistance for at least 90 days. Examples of ADLs include eating, toileting, transferring, bathing, dressing and continence. Also, an individual is classified as chronically ill if he or she requires substantial supervision to be protected from health and safety threats due to severe cognitive impairment.
The Tax Court addressed the deductibility of CCRC costs for independent living residents who sign lifetime contracts in Delbert L. and Margaret J. Baker v. Commissioner of Internal Revenue (122 T.C. 143, 2004). In this case, a husband and wife bought into a California CCRC in 1989. It provided four living arrangement categories: 1) independent living, 2) assisted living, 3) special care for people with Alzheimer's and dementia, and 4) skilled nursing. The couple paid an entry fee of approximately $130,000 plus monthly fees of roughly $2,200 for the years in question, in exchange for lifetime residential privileges in the community.
In 1989, the couple moved into a two-bedroom, two-bath independent living duplex. The unit included a monitored emergency pull-cord system for medical crises. The couple also had access to medical services available at the CCRC's on-site health center. Other amenities available to the independent living-status residents included a pool, spa and exercise facility.
On their 1989 return, the couple claimed $34,541 of the entry fee as a medical expense. On their 1997 and 1998 returns, the couple claimed medical expense deductions for 40.3% and 41.6% of their monthly fees, respectively. A committee of retirement community residents calculated those percentages using certified financial information provided by a nonprofit entity operated by the CCRC. Essentially, the percentages were the CCRC's total annual medical expenses divided by the total annual fees collected from residents.
The taxpayers claimed additional medical expense deductions based on the husband's use of the pool, spa and exercise facility. His doctor provided a written statement indicating that swimming, whirlpools and exercise were imperative to maintaining the husband's health, because he suffered from hypertension, heart disease and arthritis.
The IRS audited the couple's 1997 and 1998 returns and disallowed a portion of their medical expense deductions. The IRS allowed a deduction of only 19.01% of the couple's monthly CCRC fees. Deductions for use of the pool, spa and exercise facility were disallowed. When the Tax Court was reviewing the case, the IRS changed its position. It claimed that any allowable medical expense deductions must be based on complicated actuarial calculations that account for the taxpayers' longevity and health care use.
The Tax Court determined that the IRS had historically allowed taxpayers to use the percentage method. Moreover, the IRS hadn't issued any guidance that disallowed the percentage method — or that specifically required the use of complex actuarial calculations. Therefore, the court applied a simple percentage method to calculate allowable medical expense deductions. (See "Deducting CCRC Fees Under the Percentage Method" below.)
In addition, the court disallowed the taxpayers' medical expense deductions for the husband's use of the CCRC's pool, spa and exercise facility. This was mainly because the taxpayers failed to present a supportable allocation of entrance and monthly fees to the operation and maintenance of these amenities. The Tax Court noted that expenses allocable to the pool, spa and exercise facility wouldn't be deductible as medical costs if using those amenities is simply beneficial to a resident's overall health. Costs eligible for the deductions must be necessary to prevent or alleviate one or more specific medical conditions.
Is a CCRC the right choice for you or a loved one? Long-term care decisions involve significant financial and tax considerations, and the deductibility of CCRC fees depends on contract terms, the level of care received and proper documentation. Contact your tax advisor to discuss how CCRC costs may affect your tax situation and planning strategy. An experienced professional can help evaluate these factors and ensure that any medical expense deductions you claim are well supported.
How do you calculate the percentage of continuing care retirement community (CCRC) fees to claim as itemized medical expense deductions? Here's a hypothetical example of how the calculations work, based on the guidance provided by the Baker decision. (See main article.)
In 2026, Phil and Jill sign a contract to enter an upscale CCRC. The CCRC will provide the married couple with housing, one meal per day, activities and lifetime care, including certain medical care. In return, Phil and Jill pay a one-time entry fee of $600,000 and monthly fees of $7,000, subject to annual inflation adjustments.
The CCRC also provides Phil and Jill with documentation indicating that 30% of its operating expenses are incurred to provide medical care for residents, based on verifiable financial information. This percentage is based on an average entrance fee of $300,000 per person for the tax year (total entrance fees divided by the number of new residents entering that year) and an average monthly fee of $3,500 per person for the tax year (total monthly fees divided by total resident months for that year).
Using the percentage method, Phil and Jill can treat $180,000 of their entrance fee as a medical expense (30% of $600,000). They can also treat $2,100 of each monthly payment as a medical expense (30% of $7,000).
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