Some retirement homes and care facilities require the payment of an up front life-care fee, sometimes referred to as a “founder’s fee.” The question arises whether or not that fee might be deductible as a medical expense.

Taxpayers can deduct, in the year paid, the portion of a life-care fee or “founder’s fee” paid to a retirement home that is properly allocable to medical care if the payment is made in return for the home’s promise to provide lifetime care, including medical care. The same applies to monthly fees paid under a life-care contract.

Generally, payments to a private institution for lifetime care, supervision, treatment, and training of a physically or mentally impaired child upon the parents’ death or inability to provide care are deductible medical expenses if the payments are a condition for the institution’s future acceptance of the child and aren’t refundable as deductible medical expenses.

For elderly patients, in which only the medical care costs themselves were deductible, the IRS and Tax Court have determined the portion of the life-care fee allocable to medical care as a fraction of the total fee paid to the facility is deductible regardless of the actual costs of the medical care provided. The fraction is determined on the basis of the facility’s own experience or that of a comparable facility.

Generally, the IRS allows the facility to use one of two methods in determining the portion of the total fee that is deductible as a medical expense, either:

(a) All of the facility’s direct medical expenses divided by its total expenses, or
(b) The portion of fees that the facility historically used to provide medical care divided by the entire fee.

The same allocation methods can be applied to the monthly service fees paid to a facility. The facility should provide the allocation of the fee for the medical deduction at the time the fee is paid or annually if part of the monthly fees paid is deductible.

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