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Questions often asked by clients are whether amounts paid by either a parent or his child for the parent's long-term medical care, including amounts paid to the nursing home, are deductible against the payer's income, whether insurance premiums covering the cost of long-term care including nursing home expenses (for the part of the year before the parent enters the nursing home) are deductible, and whether the gain on the sale of the parent's home will qualify for the $250,000 exclusion. These matters and other tax aspects which should be considered in connection with the parent entering a nursing home are discussed below.

Deductibility of long-term medical care services. 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 as requiring substantial supervision for protection due to severe cognitive impairment (memory loss, disorientation, etc.). A victim of Alzheimer's disease qualifies.

Deductibility of premiums paid for qualified long-term care insurance. 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 the premiums, along with other medical expenses, exceed 7.5% of the payer's adjusted gross income. A qualified long term care insurance contract is insurance that provides coverage only for qualified long term care services, does not pay costs that are covered by Medicare, is guaranteed renewable, and does not provide for a cash surrender value. A policy is not 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 are includible as medical expenses up to the following dollar amounts: For individuals 60 to 70 years old, the year 2000 limit on deductible long-term care insurance premiums is $2,200, and for over age 70, $2,750.

Deductibility of amounts paid to the nursing home. 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 is not in the nursing home principally to receive medical care, then only the portion of the fee that is allocable 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 allocable to food or lodging.

Deductibility of medical expenses paid by a child for his parent. If a parent qualifies as a dependent under the rules discussed below, a child can include any medical expenses he incurs for the parent along with the child's own medical expenses when determining his medical deductions. If the parent does not qualify as a dependent only because of the gross income or joint return test [(b) and (c), below], the child can still include these medical costs that he paid with his own.

Claiming a parent confined to a nursing home as a dependent. A child may be able to claim his parent as a dependent, thus qualifying for an exemption, even though his parent is confined to a nursing home. To qualify, (a) the child must provide more than 50% of his parent's support costs, (b) his parent must not have gross income in excess of the exemption amount ($2,800 in year 2000), (c) his parent must not file a joint return for the year, and (d) his parent must be a U.S. citizen or a resident of the U.S., Canada, or Mexico. Since the parent is related to the child, the parent can qualify as a dependent even though the parent does not live with the child, provided the support and other tests mentioned above are met. Amounts the child pays for qualified long-term care services required by his parent and eligible long-term care insurance premiums, discussed above, as well as amounts the child pays to the nursing home for his parent's medical care, are included in the total support the child provides. If the support test [(a) above] can only be met by a group (the child and his brothers and sisters, for example, combining to support their parent), a multiple support form can be filed to grant one of the group members the exemption, subject to certain conditions.

Qualification for head of household filing status. If the child is not married and he is entitled to claim a dependency exemption for his parent, the child may qualify for the head of household filing status, which is more favorable than the single filing status. The child may be eligible to file as head of household even if the parent for whom he claims an exemption does not live with him. In order to qualify for the favorable head of household status, generally the child must have paid more than half the cost of maintaining a home for himself and a qualifying relative for more than half the year. In the case of a parent, however, the child may be eligible to file as head of household if he pays more than half the cost of maintaining a home that was the principal home for his parent for the entire year. Thus, if the parent is confined to a nursing home, the child is considered to be maintaining a principal home for his parent if the child pays more than half the cost of keeping his parent in the nursing home.

Qualification of gain on sale of the parent's home for the $250,000 exclusion. If the parent sells his 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 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 if the seller becomes physically or mentally unable to care for himself at any time during the five-year period. The parent can qualify for this exception to the use test if, during the five-period before the sale, the parent (1) becomes physically or mentally unable to care for himself, and the parent owned and lived in the home as his principal residence for a total of at least one year. Under this exception, the parent is treated as using the home as his principal residence during any time during the five-year period in which he 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 the parent's condition.

Exclusion for payments under life insurance contracts. If the parent is terminally or chronically ill and is insured under a life insurance contract, he 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 the parent's nursing home.

Reverse mortgage as alternative to nursing home. It is often desirable for an elderly person to remain in his home with proper in-home care rather than entering a nursing home. A reverse mortgage loan (also called a reverse annuity mortgage or RAM) may make this a feasible alternative to a nursing home. Many states (including California) permit a reverse mortgage loan, which is designed to permit elderly persons with limited income to remain in their homes by borrowing against the value of their homes. Typically, a bank commits itself to a principal amount based on the appraised value of the property, which is loaned to the borrower in installments over a period of months or years. The monthly installments can be used to help pay for the upkeep of the home and for in-home care. Repayment of the loan is due when the principal amount has been fully paid to the borrower, or the residence that secures the loan is sold, or the borrower dies or ceases to use the home as his principal residence. The loan agreement may provide that interest will be added to the outstanding loan balance monthly as it accrues. However, interest is not deductible by the borrower at that time. Interest is not deductible until it is actually paid.