Strategy of the Month : MDS

MDS Strategy of the Month – February 2012

**ASSISTED LIVING AS A FULL MEDICAL TAX DEDUCTION**

Everyone Has the Right to Legally Avoid Taxes

Now more than ever before sponsors and owner-operators are looking for cost-effective sales and marketing strategies. Discuss with your financial professionals the fact that many of your residents can deduct the complete assisted living and memory care monthly service fee costs as a valid tax deduction. This would include all of the shelter, services and care components – the entire monthly service fee. This deduction opportunity is clearly defined in the IRS Publication 502, “Medical and Dental Expenses”, (Year 2010, the most current version is available online at www.irs.gov). In the Nursing Home section “you can include in medical expenses the cost of medical care in a nursing home, home for the aged or similar institution 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 Jim Moore.) But a reasonable rationale would be that the main purpose for being in nursing or assisted living is primarily to “get (consistent) medical care” – not for “personal” or discretionary reasons.

IRS Publication 502 further defines the typical situation as involving a chronically ill individual. (Again, emphasis has been added by Jim Moore.)

“An individual is chronically ill if within the previous 12 months, a licensed health care practitioner has certified that the individual meets either of the following descriptions:

1. He or she is unable 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.

Or . . .

He or she requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment.”

These are direct quotes from the IRS Publication 502 using the terms of our industry describing your typical high-acuity assisted living resident.

The 7.5 Percent Exclusion

IRS Publication 502 also advises the taxpayer how the deductions work.

“You can deduct on Schedule A (Form 1040) only the amount of your medical and dental expenses that is more than 7.5% of your adjusted gross income (Form 1040, line 38). In this publication, the term ‘7.5% limit’ is used to refer to 7.5% of your adjusted gross income. The phrase ‘subject to the 7.5% limit’ is also used. This phrase means that you must subtract 7.5% (0.075) of your adjusted gross income from your medical expenses to figure your medical expense deduction.”

Most income-qualified Seniors are already at that threshold deduction level having spent at least 7.5% of their adjusted gross income on prescription drugs, medical co-payments, etc. and other medical expenses not covered by Medicare.

Let’s look at a typical situation. With a $3,500 per month or $42,000 per year assisted living tax deduction, most assisted living residents would qualify for a $42,000 tax deduction. So, the after-tax benefit for a Senior with a gross annual pre-tax income of $50,000 is approximately $525 per month. This assumes the Senior is in a 15 percent average tax bracket. That is equivalent to rolling back your base monthly service fee prices approximately four years to 2008 levels – without costing you any lost cash flow. That is assuming you normally escalate your pricing about 4 percent annually.

For a Senior with a higher gross annual pre-tax income of $65,000 and a tax bracket of approximately 18%, the approximate savings is $630 per month and the effective price roll back is about five years to 2008 levels.

Note that some medical deductions cannot be claimed if they have been reimbursed by either private insurance or the Medicare and Medicaid programs. And, unfortunately, low-to-moderate income seniors, who currently pay little or no taxes, will realize little tax benefit from this concept.

An obvious question might be, “If this is a legitimate tax benefit, why is it just becoming common knowledge for many operators in the assisted living arena?” It’s not. A number of major assisted living companies have been quietly implementing this concept for years. Some see it as their “competitive advantage” so why spread the word to competitors. Some are even using the benefit as a topic and central theme for seminars that generate significant favorable traffic.

2012 will likely be another challenging year. We need to exploit every legitimate opportunity.

Caution: The information and observations contained herein may be subject to varied interpretations by senior care professionals. Each sponsor and owner/operator should seek independent advice and counsel from their own professionals. You should always advise Senior consumers to also obtain independent professional second opinions on this important matter.

Jim Moore is president of Moore Diversified Services, Inc., a national Senior housing and health care consulting firm based in Fort Worth, Texas. He has written several books about assisted living and Senior housing, including Assisted Living Strategies for Changing Markets as well as his most recent Independent Living and CCRCS . Jim Moore can be reached at 817-731-4266 or jimmoore@m-d-s.com.