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Question: Mary’s mother, Martha, lives in a nursing home with an annual cost of $72,000. Fortunately, Martha has a long-term care (LTC) insurance policy that covered $65,000 of those expenses for the 2023 tax year. Mary believes that Martha can deduct all nursing home costs that exceed 7.5% of the adjusted gross income (AGI) of $90,000 reported on Martha’s I Schedule A. However, Martha’s CPA, Sue, disagrees and believes that Martha’s deductions will be limited to the amount not reimbursed through her LTC policy. Who is correct in this scenario and how much of a deduction is allowed by Martha?

Answer: Sue is right. When it comes to deducting medical expenses on your tax return, you can only include the amounts you personally paid out of pocket. Any amounts reimbursed by insurance must be subtracted from the total expenses before you calculate your deduction [§213(a)].

Since Martha’s long-term care policy covered $65,000 of the nursing home costs, she can only use the remaining $7,000 ($72,000 total cost minus $65,000 reimbursement) to determine the deduction.

Martha’s AGI is $90,000. Martha’s filing status is single. She will not be able to deduct the first $6,750 ($90,000 multiplied by 7.5%) in medical and dental expenses on Schedule A. Based solely on the nursing home annual cost, Martha would only be able to include $250 in expenses on Schedule A.

In summary, while Mary might have thought Martha could deduct all her nursing home expenses that exceed 7.5% of her AGI, the rules are clear. The deduction is limited to the expenses Martha actually paid after accounting for any insurance reimbursements. So, Sue’s guidance aligns with IRS regulations, ensuring Martha correctly navigates her tax deductions.