Dear Clients and Friends:

There are many issues, which need to be considered when helping an aging parent who is facing a nursing home stay and other related life issues such as selling their residence.

The costs of qualified long-term care, including nursing home care, are deductible as medical expenses to the extent they, along with other medical expenses, exceed 7.5% of adjusted gross income. Qualified long term care services are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal care services required by a chronically ill individual provided under a plan of care presented by a licensed health care practitioner.

To qualify as chronically ill, an individual must be certified by a physician or other licensed health care practitioner (e.g., nurse, social worker, etc.) as unable to perform (without substantial assistance) at least two activities of daily living (e.g., eating, toileting, bathing, continence, etc.) for at least 90 days due to a loss of functional capacity, or require substantial supervision for protection due to severe cognitive impairment (memory loss, disorientation, etc.). A victim of Alzheimer's disease qualifies.

Premiums paid for a qualified long-term care insurance contract are deductible as medical expenses (subject to an annual premium deduction limitation based on age, as explained below) to the extent they, along with other medical expenses, exceed 7.5% of adjusted gross income. A qualified long term care insurance contract is insurance that provides coverage only for qualified long term care services, doesn't pay costs that are covered by Medicare, is guaranteed renewable, and doesn't provide for a cash surrender value. A policy isn't disqualified merely because it pays benefits on a per diem or other periodic basis without regard to the expenses incurred during the specific payment period. Qualified long-term care premiums may be included as medical expenses up to the following dollar amounts: For individuals 60 to 70 years old, the 2001 limit on deductible long-term care insurance premiums is $2,290, and for over 70, $2,860.

Amounts paid to a nursing home are fully deductible as a medical expense if the principal reason that a person stays at the nursing home is for medical, as opposed to custodial care. However, if a person isn't in the nursing home principally to receive medical care, then only the portion of the fee that is allocated to actual medical care qualifies as a deductible medical expense. In that case, there is no deduction, for example, for the portion of the fee that is allocated to food or lodging.

If your parent qualifies as your dependent under the rules discussed below, you can include any medical expenses you incur for your parent along with your own when determining your medical deduction. If your parent doesn't qualify as your dependent only because of the gross income or joint return test ((b) and (c), below), you can still include these medical costs with your own.

You may be able to claim your parent as a dependent, thus qualifying for an exemption, even though your parent is confined to a nursing home. To qualify, (a) you must provide more than 50% of your parent's support costs, (b) your parent must not have gross income in excess of the exemption amount ($2,900 in 2001), (c) your parent must not file a joint return for the year, and (d) your parent must be a U.S. citizen or a resident of the U.S., Canada, or Mexico. Since your parent is related to you, your parent can qualify as your dependent even though your parent doesn't live with you, provided the support and other tests mentioned above are met. Amounts you pay for qualified long-term care services required by your parent and eligible long-term care insurance premiums, discussed above, as well as amounts you pay to the nursing home for your parent's medical care, are included in the total support you provide.

If you aren't married and you are entitled to claim a dependency exemption for your parent, you may qualify for the head of household filing status, which is more favorable than the single filing status. You may be eligible to file as head of household even if the parent for whom you claim an exemption doesn't live with you. In order to qualify for the favorable head of household status, generally you must have paid more than half the cost of maintaining a home for yourself and a qualifying relative for more than half the year. In the case of a parent, however, you may be eligible to file as head of household if you pay more than half the cost of maintaining a home that was the principal home for your parent for the entire year. Thus, if your parent is confined to a nursing home, you are considered to be maintaining a principal home for your parent if you pay more than half the cost of keeping your parent in the nursing home. If your parent sells his or her home, up to $250,000 of the gain from the sale may be tax-free. In most cases, the seller, in order to qualify for this $250,000 exclusion, must have (a) owned the home for at least two years out of the five years before the sale, and (b) used the home as his or her principal residence for at least two years out of the five years before the sale. However, there is an exception to the two-out-of-five-year use test under (b) if the seller becomes physically or mentally unable to care for him or herself at any time during the five-year period.

Your parent can qualify for this exception to the use test if, during the five-year period before the sale, your parent (1) becomes physically or mentally unable to care for him or herself, and (2) your parent owned and lived in the home as his or her principal residence for a total of at least one year. Under this exception, your parent is treated as using the home as his or her principal residence during any time during the five-year period in which he or she owns the home and resides in any facility (including a nursing home) licensed by a state or political subdivision to care for an individual in your parent's condition.

If your parent is terminally or chronically ill and is insured under a life insurance contract, he or she may be able to receive tax-free payments (accelerated death benefits or so-called "viatical" payments) while living. Any lifetime payments received under a life insurance contract on the life of a person who is either terminally or chronically ill are excluded from gross income. A similar exclusion applies to the sale or assignment of a life insurance contract to a person who regularly buys or takes assignments of such contracts and meets other qualifying standards. These lifetime payments could be used to help pay the costs of your parent's nursing home.

If you have any questions on this or any related topic please feel free to call me at 315-363-3338.

Very truly yours,

G. William Hatfield
Certified Public Accountant
Certified Financial Planner