When are fees deductible?

Residents may be eligible to deduct monthly service fees

Caution: The information and observations contained in this article may be subject to varied interpretations by various professionals. Each sponsor and owner/operator should seek independent advice and counsel from his own professionals. Sponsors should fully disclose and advise senior consumers to obtain independent, second opinions on this important matter.

HOW WOULD YOU LIKE TO OFFER YOUR ASSISTED LIVING prospects and existing residents a 13 percent to 20 percent discount on their year 2000 and future monthly service fees--without costing you anything? Sounds too good to be true?

Ask your accountants and financial advisors if they think your residents can deduct the complete assisted living monthly service fee costs--including all of the shelter, services, and care components. In IRS Publication 502, Medical and Dental Expenses, it states, "you can include in medical expenses the cost of medical care in a nursing home or home for the aged for yourself, your spouse, or your dependents. This includes the cost of meals and lodging in the home if the main reason for being there is to get medical care. Do not include the cost of meals and lodging if the reason for being in the home is personal." (Emphasis added by the author.) But a reasonable rationale would be that the principal reason for being in nursing or assisted living is primarily to "get (consistent) medical care," not "personal."

IRS Publication 502 further defines a chronically ill individual as "one who has been certified by a licensed health care practitioner within the previous 12 months as:

"(1) Being unable for at least 90 days, to perform at least two activities of daily living without substantial assistance from another individual, due to loss of functional capacity. Activities of daily living are eating, toileting, transferring, bathing, dressing, and continence.

"(2) Requiring substantial supervision to be protected from threats to health and safety due to severe cognitive impairment." Sounds like a typical high-acuity assisted living resident.

The publication also explains that "You can deduct only the amount of your medical and dental expenses that are more than 7.5 percent of your adjusted gross income. This means that you must subtract 7.5 percent of your adjusted gross income from your medical expenses to figure your allowable medical expense deduction."

But most income-qualified seniors are already at that threshold deduction level due to their current medical expense deductions (prescription drugs, co-payments, etc.). Here is a typical example of how this might work in your community:

(1) Your prospect or resident has a Social Security income of $800 per month or $9,600 per year. Added to that is $30,400, which represents her existing savings portfolio returns or pension, etc. That's a total gross income of $40,000.

(2) Her accountant tells her that only $5,520 of her $9,600 Social Security income is considered taxable--resulting in an adjusted gross income (for tax purposes) of $35,920.

(3) She can also claim a standard deduction of $5,500 and a personal exemption of $2,800.

(4) Her existing medical deductions average $210 per month, or about $2,500 per year.

(5) She cannot deduct these medical expenses because 7.5 percent of adjusted gross income (exclusion) is $2,694. Her taxes on her adjusted gross income less $8,300 in deductions are computed to be $4,325 or an average tax rate of approximately 16 percent. That leaves an after-tax disposable income of $8,075 after paying her assisted living monthly service fee of $2,300, or $27,600 per year.

But now she produces an opinion memorandum from her assisted living owner/operator suggesting that she can deduct the full monthly service fee of $27,600 per year.

Her accountant now figures that her taxable income has dropped from $27,620 to $5,714 and her tax bill is reduced from $4,325 to $860. Her annual after-tax disposable income after paying $27,600 in annual assisted living fees increases 54 percent from $8,075 to $11,540. In summary, she gets $3,465 or a 13 percent after-tax dollar discount on her monthly service fees and has significantly increased her discretionary spending power. These savings are even more dramatic for seniors with gross incomes of $50,000 +.

An obvious question might be, "If this is a legitimate tax benefit, why is it just becoming common knowledge in the assisted living arena?" In fact, several major assisted living companies have been quietly implementing using this concept, but not spreading the word to competitors.

Jim Moore is president of Moore Diversified Services, a Fort Worth, Texas-based senior housing and health care consulting firm, and author of Assisted Living 2000.