Buried on page 113 of the Tax Cut and Jobs Act is Section 1308, which will repeal the medical expense deduction. While most of us shrug since we don’t itemize our deductions, one group will have to pay a lot more for care – those facing nursing home care.
The average cost of nursing home care in 2017 in the United States is $235 per day, and ranges from $165 to $350 across the country. That comes to a whopping $62,000 to $128,000 each year for nursing home care. With an average stay of 835 days, that means there could be a cost of $138,000 to $292,000 for for an average stay in a nursing home.
There are basically combinations of three ways to pay for the care – long-term care insurance, Medicaid (not Medicare), and self-pay. For most individuals, the combination involves paying for care as long as funds are available, and then applying for Medicaid, or Medical Assistance, to pay for care. Part of that plan is to extend available cash assets, usually in the form of a retirement account, by using the medical expense deduction. The income coming out of a retirement account would generally be wiped out by the deductible medical costs, resulting in no taxes on the retirement account distributions for pay for nursing home care.
Distributions from retirement accounts are usually taxed as regular income, because the funds in them have never been taxed. That means to fund an average year’s nursing home care cost, about $85,775 would have to be withdrawn. Without the medical expense deduction, that comes to an additional bill for federal taxes of approximate $18,800 annually, or an additional $50,000 to pay federal income taxes for an average stay in a nursing home.
The ‘savings’ this generates for the federal government is not separately stated in the Tax Cut and Jobs Act Section-by-Section Summary, but it is more a matter of taking with one hand and giving with the other, as those payments must be made up elsewhere, and they are likely to come in the form of additional Medicaid costs to the government.
While this is a very simplified explanation of the situation, the question is, what do you need to do to plan for this? First, seek reputable information about long-term care insurance, how it works, how much it pays, and for how long it makes payments. Don’t be afraid to compare prices and policies. Second, take a good look at your assets, and how much care they will buy for you if and when you need it. Finally, become familiar with the Medicaid requirements.
If you need further recommendations or advice, please contact me.