If you have a parent entering a nursing home, there may be more things on your mind than how it will affect your taxes. Assisted living costs are expensive, and prices are continuing to rise every year—but some of those costs may be tax deductible, and there are other tax implications that come along with the move as well.
Long-term medical care
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 (AGI).
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 that is provided under care administered by a licensed healthcare practitioner.
To qualify as chronically ill, a physician or other licensed healthcare practitioner must certify an individual as unable to perform 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 severe cognitive impairment.
Long-term care insurance
Premiums paid for a qualified long-term care insurance contract are deductible as medical expenses (subject to limitations explained below) to the extent they, along with other medical expenses, exceed the percentage-of-AGI threshold. A qualified long-term care insurance contract covers only qualified long-term care services, doesn’t pay costs covered by Medicare, is guaranteed renewable and doesn’t have a cash surrender value.
Qualified long-term care premiums are includible as medical expenses up to certain amounts. For 2023:
- If you are 40 or under at the end of the taxable year, the limit is $480.
- If you are 41-50 at the end of the taxable year, the limit is $890.
- If you are 51-60 at the end of the taxable year, the limit is $1790.
- If you are 61-70 at the end of the taxable year, the limit is $4770.
- If you are 71 or older at the end of the taxable year, the limit is $5960.
Nursing home payments
Amounts paid to a nursing home are deductible as a medical expense if a person is staying at the facility principally for medical, rather than custodial care. If a person isn’t in the nursing home principally to receive medical care, only the portion of the fee that’s allocable to actual medical care qualifies as a deductible expense. But if the individual is chronically ill, all qualified long-term care services, including maintenance or personal care services, are deductible.
If your parent qualifies as your dependent, you can include any medical expenses you incur for your parent along with your own when determining your medical deduction.
Head-of-household filing status
If you aren’t married and you meet certain 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 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.
The sale of your parent’s home
If your parent sells his or her home, up to $250,000 of the gain from the sale may be tax-free. To qualify for the $250,000 exclusion, the seller must generally have owned the home for at least two years out of the five years before the sale and used the home as a principal residence for at least two years out of the five years before the sale. However, there’s an exception to the two-out-of-five-year use test if the seller becomes physically or mentally unable to care for him or herself during the five-year period.
We're here to help
Moving a parent into a nursing home can be a long and arduous process—and, unfortunately, these are only some of the tax questions you may have. If you’d like more information, please contact your tax adviser.