How Medical Choices Can Affect Elderly’s Taxes

Very little has changed in the taxation of older Americans during the past year, yet a handful of details consistently trip up senior citizens, tax experts say.

Some forget that part of their Social Security benefits are taxable, while others fail to claim credits available to those with limited Social Security income.

But far and away the most difficult issue--both from a personal and from a tax standpoint--is medical care. The medical choices senior citizens make can have a significant effect on their tax picture.

Consider, for example, a hypothetical retired couple we’ll call Jane and John Jones. Their pension and Social Security income amounts to $30,000. They also earn about $8,000 annually on a $100,000 investment portfolio. In late 1991, Jane had a stroke, which kept her in the hospital for three weeks. Doctor, hospital and physical therapy bills amounted to more than $25,000, roughly $4,500 of which was not covered by insurance. They have about $2,500 in other itemized deductions, including charitable contributions, property and state taxes.

For the 1991 tax year, their standard deduction of $7,000 amounts to more than their itemized deductions despite the hefty medical bill. Their total tax liability for 1991 works out to $2,584.

However, for the 1992 tax year, the Joneses have to make some long-term medical decisions because Jane needs continuing help that John is not fully capable of providing. The stroke left her partially paralyzed.

They have a number of choices, including a nursing home, home care or a life care community.

Whether or not the Jones family will be able to claim tax deductions for nursing home expenses that are not covered by insurance and Medicare depends on why Jane is in the nursing home. If her doctor says she must be there to receive medical attention, all the expenses are deductible subject to the 7.5% medical expense floor.

However, if medical treatment is only a small part of why she’s there, the bulk of the costs are not deductible. If this is the case, the Joneses can deduct only the costs that are directly attributable to medical care. The costs related to room and board cannot be claimed as a deduction. If the nursing home expenses were $20,000 annually, but only $5,000 was for medical care, that’s all they could claim.

Practically speaking, the Jones family would nearly bankrupt themselves before they got a significant tax break for Jane’s nursing home care if it was not deemed medically necessary.

Some less expensive options could give them greater tax savings.

For example, they may invest in a wheelchair and equip their house with ramps that will allow Jane to get around without having to negotiate stairs. They also could hire a nurse or part-time worker to come in and administer medicine and other medically necessary care.

If this worker’s job is solely to provide medical help, all of his or her salary is tax deductible. The cost of the wheelchair and ramps are also deductible. (You may deduct the full cost of equipment installed for a medical reason if it does not increase the value of your property.)

Assuming that the health care worker’s salary was $8,000 annually and the cost of the ramps and the wheel chair amounted to $10,000, the Joneses would be able to claim itemized deductions of $15,862--the amount of expense that exceeds 7.5% of their adjusted gross income. Because they are now itemizing deductions, they will get credit for the charitable contributions and state taxes they pay, which amount to another $2,500. Their tax liability drops to about $1,170.

If they opted to move to a life care community instead, the part of their entry fees and continuing monthly fees that are related to providing medical care are tax deductible. Most life care communities spell out the medical portion on their bills.

This family may also consider buying a long-term care insurance policy, since Jane’s illness made them realize that even a short stint in a nursing home could leave the stay-at-home spouse financially strapped. However, they should realize that the cost of a long-term care policy generally is not tax deductible, said Gregg Ritchie, partner at the accounting firm of KPMG Peat Marwick.

The reason: Long-term care policies usually cover both medical and custodial care. And IRS rules say that if you pay for insurance that includes medical care and any other type of coverage, the premium is not deductible unless the part that’s allocable to medical expenses is clearly delineated. That’s difficult, if not impossible, to do with a long-term care policy.