Are CCRC Fees a Tax Deductible Expense?

Continuing Care Retirement Communities (CCRCs) offer housing, services, and healthcare for older adults, providing a structured living environment as needs change. A common question concerns the tax deductibility of fees paid to these communities. While not all CCRC fees qualify, specific portions can be considered medical expenses, potentially offering significant tax savings. This article clarifies CCRC fee types, defines qualifying medical care expenses, explains how to determine the deductible portion, and outlines necessary documentation.

Types of CCRC Fees

Continuing Care Retirement Communities typically involve several types of fees that residents pay for access to the community’s services and facilities. The initial payment upon entering a CCRC is an entrance fee, which can vary widely based on the community, contract type, and living unit size. These fees can range from tens of thousands to over a million dollars.

Following the entrance fee, residents generally pay recurring monthly service fees. These payments usually cover a comprehensive array of services, including housing, utilities, meals, housekeeping, maintenance, and various social activities. Monthly fees can range from a few thousand dollars to upwards of $10,000 or more, depending on the level of services and amenities provided.

Beyond the standard monthly charges, some CCRCs also have separate care-related fees. These are specific charges for higher levels of medical or personal care, such as assisted living, memory care, or skilled nursing, once a resident’s health needs progress. The structure of these fees, whether bundled into a life-care contract or charged on a fee-for-service basis, plays a significant role in determining potential tax deductibility.

Qualifying Medical Care Expenses

For CCRC fees to be tax-deductible, they must meet the Internal Revenue Service (IRS) definition of medical care expenses. The IRS specifies medical care expenses as costs paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for treatments affecting any part or function of the body. This definition extends to services provided in a nursing home or similar institution if the primary reason for being there is to receive medical care.

The “primary purpose test” is key for CCRCs. For a portion of CCRC fees to be deductible, the main reason for entering the community must be to obtain medical care, or the contract must guarantee access to future medical care. Even if a resident is living independently, a portion of their fees may be deductible if the CCRC contract provides for access to these services when needed, classifying them as prepaid medical expenses.

Services considered medical care within a CCRC include nursing services, medical attention, physical therapy, and other direct healthcare provisions. A portion of room and board costs can also qualify as a medical expense if the primary purpose of the stay is medical care. Conversely, expenses for custodial care, social activities, or luxury amenities not incidental to medical care are generally not deductible.

Determining the Deductible Portion

Calculating the deductible portion of CCRC fees relies on information provided by the community. Many CCRCs provide residents with an annual statement, also known as an actuarial or tax statement, which specifies the percentage of both entrance and monthly service fees allocated to medical care. This statement is the primary basis for claiming the deduction and reflects the CCRC’s overall healthcare-related costs for all residents.

If an actuarial statement is not provided, the medical expense portion may be calculated pro-rata. This involves determining the CCRC’s total medical expenses for the year, dividing that by the total number of residents, and then applying that proportion to an individual’s fees. Such a calculation often necessitates detailed financial information from the CCRC regarding its healthcare operations.

For the one-time entrance fee, a portion is considered a prepayment for future medical care and can be deductible in the year it is paid. The CCRC’s statement indicates this specific deductible percentage, which can vary but historically ranges from 55% to 65% for the non-refundable part. A percentage of ongoing monthly fees is typically allocated to medical expenses, with historical deductions ranging from 35% to 45% of the monthly fee, depending on the community’s healthcare costs.

The total medical expense deduction is subject to an Adjusted Gross Income (AGI) limitation. Taxpayers can only deduct the amount of their unreimbursed medical expenses that exceeds 7.5% of their AGI. For example, if your AGI is $100,000, you can only deduct medical expenses exceeding $7,500. This threshold applies regardless of whether expenses are from a CCRC or other medical sources.

Documentation Requirements

Maintaining thorough documentation is essential to support any CCRC medical expense deductions in case of an IRS inquiry or audit. The most important document is the annual statement provided by the CCRC, also known as an actuarial statement or tax letter. This statement should clearly detail the portion of both entrance and monthly service fees allocated to medical care.

In addition to the CCRC’s annual statement, retain a copy of your Continuing Care Retirement Community contract. This contract outlines the terms of your residency, included services, and the overall fee structure, which helps substantiate payments. Keep proof of all payments made to the CCRC, such as canceled checks, bank statements, or official payment receipts.

If the primary reason for entering the CCRC was to obtain medical care, keep supporting medical records. This might include doctor’s notes, medical assessments, or other documentation demonstrating the medical necessity of the CCRC residency. While not always required for initial filing, these records can strengthen your position if the deduction is questioned by the IRS.