Question: Not six months after my mother died, my father decided he was tired of cutting grass and dealing with the responsibilities of home ownership. My wife and I were shocked when he told us he wanted to move into a “continuing care” retirement community so he could, as they say, “age in place.” We narrowed the search down to two facilities, one of which is connected to a local church and is very established, while the other is more modern, but has been in business for just over three years.

As I understand the rules, my father would pay a rather significant one-time fee when he moves in and then a monthly fee for which he will be guaranteed his accommodations, meals, and medical care for the rest of his life. He will sell his house in order to make the first payment, and will supplement his retirement income from his other holdings as need be to pay the monthly fees. A friend told us that part of Dad’s payments should be tax deductible, but we have been unable to find a lawyer or advisor who knows anything about these kinds of contracts. Can you point us in the right direction?

Answer: When an individual enters into a life care contract with a retirement facility, he or she will generally pay an up-front “founder’s fee” and a monthly fee in return for lifetime care that includes residential accommodations, meals, and medical care. Most of these contracts also provide that, under certain circumstances, if the resident leaves, a portion of the founder’s fee will be refunded based upon a formula that generally includes a penalty provision.

According to the tax law, the portion of the founder’s fee and the monthly fee attributable to your father’s medical care should be tax deductible as a medical expense in the year paid to the extent that amount exceeds 7.5% of your father’s adjusted gross income. While this allocation is based on the facility’s experience regarding what portion of these fees are estimated to be attributable to covering the cost of providing medical care to your father, if the facility does not have the requisite financial experience, it can use financial information from a comparable retirement home or community.

If deductions are taken in one year and your father receives a refund of the founder’s fee later, the portion of the refund attributable to deductions previously taken must be included in his income.

Generally, the facility should give separate statements to each resident at the time of admission. If not given, then we would certainly question the promise of life time care that includes medical care. If, for example, the founder’s fee is used to construct capital improvements for homes, apartments, or nursing home, none of that payment will qualify as a medical expense and would not be deductible, but a portion of the monthly fee could be deducted as a medical expense.

Taking the NextStep: More and more seniors are choosing to enter staged care communities that can provide them with needed socialization, activities, appropriate diet, and long-term medical care. However, because of the complexities of these contracts and the cost of this high end care, it is essential that prospective residents look into not only the deductibility of payments, but also the financial strength of the facility and the long-term affordability of the monthly fees. The fact that these important issues were not brought up by the facilities at your meetings raises a red flag. Since these decisions should not be made overnight or on a whim, we suggest you contact a knowledgeable attorney (www.naela.org) or have your certified public accountant review the package and explain it before you jump.

More About Medical Deductions: The full cost of special equipment installed in your home –like an elevator – and improvements made for medical reasons – like installing entry and exit ramps, widening hallways, and installing railings -- are deductible as medical expenses only to the extent that the expenditure does not increase the value of your home.

FOR OUR WEB VIEWERS ONLY!! VISIT THE USEFUL LINKS ABOVE TO FIND A DIRECT LINK TO THE IRS TO PRINT THEIR GUIDE TO MEDICIAL DEDUCTIONS!!