Retiring means a lot of things, like finally having all the time to do what you’ve always wanted without having to worry about holding down a nine-to-five. Being retired is about embracing that freedom in a major way. Yet in order to enjoy your newfound freedom, you do need to ensure you have the resources to do so. No longer having to work also means no longer having steady employment income, so reducing your living costs is crucial for making your retirement savings last.
Thankfully, there are a number of ways you can reduce your costs as a senior. One of the best methods for doing so is by selling your existing home and moving to an independent living community. Not only does this reduce your overall cost of living, but there are also some tax deductions you can take advantage of as well.
Here’s what you need to know about tax deductions for independent living community residents.
The Medical Expense Deduction
Being able to deduct the costs of any out-of-pocket medical expenses is nothing new. You don’t have to be retired in order to gain access to this tax deduction, after all. However, because of the nature of some of today’s modern independent living communities, residents of these communities can and often do get a tax break on some of their living costs.
In the past, you were only able to deduct your medical expenses if you were a resident of an assisted living community where you received long-term care services. However, some modern independent living communities work under what’s known as the continuity of care principle. These continuous care retirement communities (CCRCs) provide a spectrum of medical care right on campus, and residents can get tax breaks on the cost of this care regardless of whether they need assisted living services.
How CCRC Medical Expense Deductions Work
There are two ways that seniors can claim the medical expense deduction on their taxes if they reside in an independent living community that is also a CCRC. The first of these deductions can be claimed upon moving into the community. This is because part of the entrance fee for joining one of these communities goes towards your medical costs. This means that, even if you’re living independently, you may be eligible to receive a one-time deduction for the non-refundable portion of your entrance fee in the year you paid it.
The second way you can claim medical expense deductions from living in a CCRC is through the monthly fees you pay to the retirement community for living there. These deductions are likely to be more variable, as they will depend on the amount of medical care you require. Living independently will net you a small portion of your monthly fee that will be deductible, but if you ever transition to assisted living, up to all of your monthly fees may be deductible as qualified medical expenses.
Other Things to Keep in Mind Regarding Medical Expense Deductions
Being able to deduct qualified medical expenses from your taxes every year can result in some significant long-term savings. This offers great opportunities to enjoy your retirement much more fully, even if you’re only claiming a portion of your monthly fees while living independently.
However, you do need to keep in mind some of the limitations set in place by the federal government. Specifically, the IRS has set rules that prevent you from claiming your qualified medical expenses on your taxes unless they first exceed 7.5 percent of your adjusted gross income for the year.
Even More Tax Incentives for Moving to an Independent Living Community
Perhaps the one thing that we haven’t paid enough attention to in this discussion is how moving to an independent living community can result in the lessening of your tax burden in other ways. One of the most important of these ways is perfectly illustrated when comparing the amount of taxes you need to pay as a homeowner versus as a resident of an independent living community.
Owning property comes with many benefits, but there’s one major drawback when it comes to how much taxes you pay every year. This doesn’t have anything to do with income tax, however – instead, it’s all about what you have to pay in property taxes. Depending on the tax rate of your neighborhood, you could be paying tens of thousands of dollars a year for the privilege of being a homeowner – money that you aren’t responsible for paying if you’re an independent living community resident.
Tax Deductions for Independent Living Community Residents
Not every independent living community is also a continuing care retirement community, but for the seniors who do choose a CCRC can avail themselves of significant tax deductions on their qualified medical expenses. An even bigger advantage that these retirement communities offer, especially when compared to seniors living at home, is that retirement community residents aren’t responsible for paying several thousand dollars a year in property taxes.
No matter how you look at it, moving to an independent retirement community is a great opportunity for reducing your tax liabilities as much as possible. This, in turn, helps you stretch your retirement savings as far as you can, so that you can enjoy a comfortable quality of life and participate in all the activities that go along with being retired without worry.
If you have any questions about the different types of tax deductions you can access while living in an independent living community during your retirement, it’s always recommended to speak to a certified retirement planner, accountant, or another financial expert.
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