Our residents qualify for hefty tax breaks as part of the Life Plan agreement, as the IRS views the non-refundable entrance fee as a prepayment expense for health care services. In addition to entrance fees, a portion of your monthly service fee (MSF) is also tax deductible. The logic behind both deductions is that payments entitle residents to lifetime health care as part of their residential agreement, so a portion of their expenses really represents the cost of future health care benefits.
On our campus, the tax deduction ranges between 40–45% each year. Many financial advisers and attorneys are not familiar with the medical tax deductions linked to Life Plan Community fees, although accountants may be. We encourage you to have your advisors contact us for more information.
Here is an example of how the tax benefit would work based on a couple paying a $250,000 entrance fee and monthly fees of $3,500; they are in a 20% federal income tax bracket:
Of the $250,000 entrance fee, $112,500 (45% of $250,000) would be considered a qualifying medical expense. Only medical expenses above 10 percent of adjusted gross income may be deducted from income taxes, so the amount of the deduction will depend on the couple’s taxable income and whether they have any other qualifying medical expenses. For a couple reporting $125,000 of taxable income (from Social Security, pensions and investment earnings, for example), only medical expenses above $10,000 could be deducted. If the couple had no medical expenses other than their Life Plan Community entrance fee, they could deduct $102,500 ($112,500 minus $10,000) from their taxable income. If they were in the 20% tax bracket, this would save them $20,500 in the tax year during which they paid the entrance fee. On an ongoing basis, tax deductions for the monthly fees work the same way. In practice, most people have additional medical expenses, so the Life Plan Community tax benefit would yield larger tax savings.