A NEIGHBOR WAS recently telling me about the increasing amount of care he and his wife have to provide to his 90-year-old mother-in-law, and the challenges and expenses he expects in the near future.
I was able to offer some advice—because this is an area where my wife and I have significant experience. Together, we took care of her parents and mine, both medically and financially. If this is something you’re experiencing, or may soon, you would do well to learn about the six activities of daily living. The six ADLs are generally recognized as:
Long-term-care (LTC) providers use ADLs as a measure of whether assistance is required and how much help is needed. To qualify for Medicaid nursing home benefits, the state may do an assessment to verify that an applicant needs assistance with ADLs. Other state programs may also require that an applicant be unable to perform a certain number of ADLs before qualifying for assistance. In addition, LTC insurance usually uses the inability to perform two or more ADLs as a trigger to begin paying on a policy.
On top of all that, ADLs play a significant role in determining whether you can take a tax deduction for the costs of an assisted living facility, such as a nursing home or a continuing care community. To deduct assisted living expenses, the resident must be considered “chronically ill.” This means a doctor or nurse has certified that the resident either can’t perform at least two ADLs or requires supervision due to a cognitive impairment, such as Alzheimer’s disease or another form of dementia.
In addition, for a resident of an assisted living facility to qualify for a tax deduction, personal care services must be provided according to a plan of care prescribed by a licensed health care provider. This means a doctor, nurse or social worker must prepare a plan that outlines the specific daily services the resident will receive. For further details, check out IRS Publication 502.
Usually, only the medical part of assisted living costs is deductible, while ordinary living costs—such as room and board—are not. If the resident meets the criteria above, however, room and board may be considered part of medical care and the cost may be deductible. The assisted living facility should provide you with a breakdown of costs.
What if you choose care at home rather than at an institution? Again, IRS Publication 502 provides the answer. In the “nursing services” section, the IRS says that nursing services at home are deductible, potentially including “certain maintenance or personal care services provided for qualified long-term care.”
In my mother-in-law’s case, she had dementia and needed help with several ADLs. Luckily, she had the resources to afford a safe and comfortable facility. Her income included a small pension, Social Security, and dividends and interest. But given the huge costs of long-term care, her itemized deductions each year were roughly $40,000 higher than her taxable income.
Thanks to that $40,000 of “extra” itemized deductions, we were able to withdraw that sum from her remaining IRAs for a number of years and not owe any federal taxes. When her IRAs were drained, we sold taxable-account investments and realized some long-term capital gains—and again, thanks to her “extra” itemized deductions, there was zero federal tax. One caveat: A parent may still owe state taxes if the state government taxes retirement income or capital gains.
Planning for our own, or our parents’, elder years is one of the more challenging aspects of financial planning. My wife and I learned how important it is for adult children to talk openly with their parents about their wishes. Equally important, seniors should talk with their children while they still have all their faculties. Engaging an expert in elder law, especially for the nightmare that a Medicaid application presents, is also a great idea.
Richard Connor is a semi-retired aerospace engineer with a keen interest in finance. He enjoys a wide variety of other interests, including chasing grandkids, space, sports, travel, winemaking and reading. Follow Rick on Twitter @RConnor609 and check out his earlier articles.