Taxes are one of life’s certainties, even if you’re enjoying all of the benefits that come from living in a senior living community; just as the holidays and the New Year roll around each year without fault, so does tax season.
You might wonder if you can deduct senior living expenses from your taxes. The answer, as it turns out, depends on your circumstances. No matter what your unique financial circumstances are, though, a number of strategies can help you save money at tax time.
Remember that taxes are highly complex, and a small change in circumstances or accounting may affect your tax liability, as well as what you can deduct. So be sure to seek tax advice from a tax professional.
Do Seniors Have to Pay Taxes?
Before spending a lot of time on tax preparation, you’ll need to assess whether you have to pay taxes at all. In general, seniors do not have to file a tax return until they earn more than $14,7000 ($28,700 for married couples filing jointly) in non-exempt income. This includes hobby or freelance income.
If you don’t meet this threshold, you probably do not have to pay taxes. If you’re not sure if you’re eligible, contact the IRS’s Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) programs, which offer free tax support to seniors and those with low incomes.
What about Social Security? Social Security income is not usually taxable as long as you remain below certain thresholds. The rule for 2022 is as follows:
- Individuals with a total income between $25,000-$34,000 must pay taxes on up to 50 percent of Social Security benefits. For married couples filing jointly, the threshold is $32,000–$44,000,
- Individuals reporting in excess of $34,000 in income must pay taxes on up to 85 percent of Social Security income. For married couples filing jointly, 85 percent taxation kicks in at $44,000.
Note that if someone else is paying for your medical expenses or senior living, they can usually deduct those senior living costs on their taxes. For many families, this is a more useful financial strategy, especially if the person paying for a senior living community is still working.
Can You Deduct Senior Living Expenses on Your Taxes?
The ability to deduct senior living expenses usually comes down to whether the expense is a medical expense or not. That depends on the type of senior living you’re paying for.
Independent living expenses aren’t tax deductible as medical expenses. In some cases, you may be able to deduct the entry fee of a Life Plan Community or continuing care retirement community (CCRC) as a prepaid medical expense—but this depends on the specific services you have paid for. You’ll need to have proof that you paid for medical expenses and can only deduct the medical component of the fee.
Although you can’t usually deduct independent living expenses as medical expenses, you may still be eligible for other deductions:
- Medical services in an independent living community, such as wound care management or a home health aide, are generally deductible.
- The cost of a home office is deductible as long as you exclusively use the space as such. If you run a business out of your independent living apartment, you can deduct a proportional share of the rent as a business expense.
Even if you have an eligible medical deduction, you may not be able to claim it in full. The total of all of your medical expenses must be more than 7.5 percent of your adjusted gross income (AGI), which is your income minus adjustments. No such threshold applies for business expenses.
Assisted Living and Memory Care
You have a better chance of being able to deduct assisted living and memory care expenses because both types of senior living communities provide some qualifying medical services. In most cases, your expenses will have to meet the following requirements:
- Certification from a nurse or physician that at least two activities of daily living must be performed with caregiver assistance
- A care plan outlining the required assistance
As with other medical expenses, the costs will have to exceed 7.5 percent of AGI.
Do I Need to Itemize and Deduct Expenses?
Deducting senior living expenses can be complicated and time-consuming. It may not be worthwhile if the amount of the deductions is lower than the standard deduction. The standard deduction is the amount everyone gets to take.
- Single: $12,950
- Married filing separately: $12,950
- Head of household: $19,400
- Married filing jointly: $25,900
- Surviving spouse: $25,900
People who are over 65 can claim an additional $1,400, or $1,750 for single filers and heads of household. Those who are both over 65 and blind can, depending on filing status, claim an additional $2,800 or $3,500.
What About Taxes and My Social Security Benefits?
If you have substantial additional income—such as self-employment, interest, and other taxable income that is reported on your tax returns along with Social Security benefits—you may be required to pay federal income tax.
Taxes would only be paid on up to 85 percent of your Social Security benefits according to the following guidelines:
- If you file as an individual with a combined income between $25,000–$34,000, you may have to pay tax on up to 50 percent of your Social Security benefits.
- If you file as an individual with more than $34,000 in combined income, up to 85 percent of your Social Security benefits may be taxed.
- If you file a joint tax return with a combined income between $32,000–$44,000, you may have to pay tax on up to 50 percent of your Social Security benefits.
- If you file jointly and your combined income is more than $44,000, you may have to pay tax on up to 85 percent of your benefits.
Other Tips for Senior Taxes
Every year, the IRS updates all of its income thresholds and tax brackets. It is important to review these guidelines each year and seek expert tax advice.
The following guidelines may help you prepare for this year and save as much money as possible:
- If you are deducting eligible medical expenses, you must itemize them on Schedule A. You do not have to list each individual medical expense, nor provide receipts or other proof with your tax return. But you should retain copies of the invoice, proof of payment, and details about the nature of the medical care so that you are ready in the event of an audit.
- Every January, you’ll receive a Social Security Benefit Statement (Form SSA-1099), which shows the amount of benefits you received for the previous year. Use this figure to determine whether your Social Security income combined with other income brings you to a total figure that requires you to pay taxes.
- Scammers often target older adults. Know that the IRS will not call or email you to seek passwords or other sensitive information. They will not have you arrested suddenly and without warning and will not call you to demand money. The IRS sends communications on official letterhead.
- The IRS only accepts payment via check or through its official payment partners. Never wire money to anyone claiming to collect on behalf of the IRS.
Taxes can be complicated and overwhelming. Learn more about saving the most money and following tax guidance with our e-book, Senior Living Taxes and Beyond.
***Disclaimer: All information contained in this post refers to 2022-2023 tax information.