Medicaid & Taxes: The Deductions and Loopholes You Need to Know

April is Tax Season – Are You Maximizing Your Benefits?

Tax season is here, and while most people focus on deductions for homeownership or charitable giving, many overlook how medical expenses, long-term care, and Medicaid can impact their taxes. If you or a loved one are planning for long-term care or already receiving Medicaid benefits, understanding these tax strategies could save you thousands.

Deducting Long-Term Care Costs

If you or a family member are in a nursing home or assisted living facility, a significant portion of those expenses may be tax-deductible—but only if they meet certain IRS guidelines. Generally, expenses for medical care, including room and board for those receiving qualifying care, can be deducted if they exceed 7.5% of your adjusted gross income (AGI).

Keep detailed records of all medical and long-term care expenses throughout the year to claim every deduction possible.

Can You Deduct Medicaid-Paid Expenses?

While Medicaid itself does not directly provide tax deductions, expenses paid out-of-pocket before Medicaid coverage begins may be deductible. Additionally, some states allow Medicaid-qualifying trusts (such as Miller Trusts) to be structured in a way that provides tax advantages.

If you or a loved one have spent personal funds on care before qualifying for Medicaid, talk to a tax professional to see if those costs can be deducted.

Caregiver Tax Benefits

Many families provide unpaid care for elderly parents. If you're financially supporting a parent who qualifies as your dependent, you may be eligible for: The Dependent Care Credit – A tax credit for certain care expenses. The Medical Expense Deduction – If you pay for their care and it exceeds 7.5% of your AGI.

The Hidden Loophole: Health Savings Accounts (HSAs) & Medicaid

For those not yet on Medicaid, Health Savings Accounts (HSAs) offer a powerful tax advantage. HSAs are a tax-advantaged savings account available to individuals with a high-deductible health plan (HDHP). While you're still healthy, contributions are tax-deductible, grow tax-free, and can be withdrawn tax-free for qualified medical expenses, including long-term care insurance premiums. HSAs offer a legal and smart way to plan ahead for long-term care costs. But once Medicaid is in the picture, the HSA becomes a countable asset — so early planning is essential to make the most of this tax-advantaged tool.

Tax laws and Medicaid regulations are complex, but strategic planning can protect assets, maximize tax savings, and ensure long-term care coverage. If you need help navigating the Medicaid process, our qualified staff at Whitehead & Munson are here to help!

Call us at (860) 400-3020 to schedule a free consultation today!

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