Loved Ones and Funding Long-Term Care (LTC)

As a Financial Advisor, I understand that planning for long-term care (LTC) for your loved ones is both a financial and emotional priority. Navigating the complexities of funding these essential services can seem overwhelming, yet there are often overlooked tax strategies that can significantly ease the burden. One such strategy is the “medical expenses deduction” available at 7.5% of your Adjusted Gross Income (AGI). This deduction allows you to write off unreimbursed medical and dental expenses that exceed 7.5% of your income. By leveraging this deduction, you may be able to offset some, or all, of the substantial costs associated with long-term care—costs that are increasingly important to our loved ones as they age and require specialized care.

In this article, I will explain how to effectively incorporate the medical expenses deduction into your overall financial planning strategy. I aim to demystify the process and provide you with actionable insights that can lead to smarter, more informed decisions regarding LTC funding. To illustrate these concepts in a practical context, I’d like to review a detailed case study that outlines real-world application of these tax strategies.

John and Penny, married for 62 years, were admitted to a long-term care (LTC) facility only a few months apart, incurring a combined monthly cost of $23,000—and their care was deemed by the facility as fully covered under the medical expense deduction. Their funding options included $1,500,000 in Apple stock (with a near-zero cost basis), $600,000 in IRA accounts, and a primary residence valued at $2,300,000, purchased 50 years ago for $50,000. With a modest combined Social Security income of $35,000, their financial landscape might seem like a tax minefield at first glance.

In their scenario, our CPAs utilize the medical expenses deduction in their 2025 tax analysis, revealing that John and Penny can strategically draw up to $348,000 of adjusted gross income at 0% tax from a combination of sources: Social Security income, IRA distributions, and the sale of Apple stock. While some advisors might suggest liquidating the primary residence or taking out a HELOC at 8–10% interest to meet immediate funding needs, our recommendation to withdraw from IRAs and realize long-term capital gains at 0% is more targeted to take advantage of tax law efficiencies. This strategy exemplifies how thoughtful, tax-sensitive planning can provide both liquidity and asset preservation, ensuring that John and Penny’s long-term care expenses are managed effectively while safeguarding their financial legacy.

Most insurance agents, stockbrokers, and robo-advisors are not equipped to make such complex recommendations. Madrona Financial and CPAs, on the other hand, is uniquely qualified to discuss sophisticated tax and wealth strategies, and to navigate decisions as they arise to protect your long-term wealth.

DISCLOSURES:
The information, suggestions, and recommendations included in this material is for informational purposes only and cannot be relied upon for any financial, legal or insurance purposes. Madrona Financial Services will not be held responsible for any detrimental reliance you place on this information. It is agreed that use of this information shall be on an “as is” basis and entirely at your own risk. Additionally, Madrona Financial Services cannot and does not guarantee the performance of any investment or insurance product. Insurance products are offered through Madrona Insurance Services, LLC, a licensed insurance agency and affiliate of Madrona Financial Services. Madrona Insurance Services and individual advisors affiliated with Madrona Insurance Services and Madrona Financial Services receives commissions on the sale of insurance products. Clients are not required to purchase insurance products recommended or to otherwise implement financial advice through Madrona affiliates. When we refer to preparation and filing of tax returns, tax returns are prepared and filed by our wholly-owned sister company Bauer Evans, Inc. P.S., a licensed certified public accounting firm. Madrona Financial Services, LLC is a registered investment adviser with the SEC. Our registration with the SEC or with any state securities authority does not imply a certain level of skill or training. Madrona Financial & CPAs is a registered trade name used singly and collectively for the affiliated entities Madrona Financial Services, LLC (“Madrona”) and Bauer Evans, Inc., P.C. (“Bauer Evans”). Investment advisory services are provided through Madrona. CPA services are provided through Bauer Evans. While it's essential to optimize your tax situation, it's equally important to comply with tax laws and regulations. Always ensure that your tax-saving strategies are legal and appropriate for your financial situation.