Long-Term Care Insurance can be a great way to pay for care costs as you age and require ongoing help with everyday living activities or supervision due to cognitive decline. It can also come with substantial tax benefits. Long-Term Care Insurance has attractive tax treatment under Section 7702(b). In addition to the potential tax deductibility, proceeds from qualified Long-Term Care Insurance remain tax-free even if you can deduct the premium.
The Internal Revenue Service (IRS) has released figures for 2024 related to Long-Term Care Insurance tax deduction amounts.
Also included in this article is information on 2024 HSA contribution limits. Both can inform your financial planning, particularly as it relates to long-term care and medical costs.
Details are below, including special considerations for usage of HSA funds and different types of Long-Term Care Insurance policies, and the tax benefits that may accompany them.
Long-Term Care Tax Deduction Amounts Down From 2023
The biggest news with the release is the fact that the deduction amounts are down compared to 2023. This has never happened before!
Not to worry, though, the reduction is extremely minor, and represents an increase over 2022 deduction amounts. The table below has the year-over-year comparison:
|Age at end of 2024
|40 or less
|41 - 50
|51 - 60
|61 - 70
|More than 70
Remember, benefits paid under a qualified Long-Term Care Insurance policy are generally excluded from taxable income. However, some indemnity or cash products that pay a daily or monthly benefit without regard to actual bills are subject to a per diem limitation.
Individual Taxpayer Deduction of Premiums
Tax-qualified Long-Term Care Insurance premiums are deductible, and this includes premiums paid by a spouse or eligible tax dependent, as personal medical expenses.
However, this is dependent on itemizing your taxes. Additionally, the amount deductible is based on your adjusted gross income (AGI). Expenses over 7.5% of your AGI are considered tax deductible.
As always, be sure to consult with a tax professional for additional details.
Health Savings Accounts - 2024 Contribution Limits
The 2024 contribution limit for Health Savings Accounts (HSAs) is $4,150 for individuals and $8,300 for families. If you’re over 55 years old, this limit increases by $1,000, which is often known as a “catch-up” contribution increase. Employer HSA contributions are not treated as taxable income but do count toward your annual contribution limit.
For comparison, the 2023 limits were $3,850 for individuals and $7,750 for families.
Health Savings Accounts (HSAs) are offered by many employers as a way for employees to pay for health care costs while also lowering the cost of health care insurance.
HSA pre-tax money can be used to pay for qualified Long-Term Care Insurance premiums.
This is not generally well-known, but can be a great use for HSA funds.
Using Tax-Free HSA Funds
Past age 65, HSA funds can be used for any expense, including those unrelated to health care expenses. Prior to this point, there are penalties for using HSA funds outside of this.
However, the money is tax-free when it is used regardless of what it is used toward.
Tax-qualified Long-Term Care Insurance policies are considered a medical expense. So among other options, HSA funds can be used to pay Long-Term Care Insurance premiums.
Importantly, you can’t use pre-tax money from an HSA to pay for an LTC policy and also take a tax deduction.
However, you can use HSA funds to pay for policy premiums before age 65 as well, making it a great way to offset the cost of these premiums, while utilizing HSA funds for a qualified expense.
Combined, obtaining a Long-Term Care Insurance policy and using HSA funds to pay for policy premiums can be a great way to utilize tax-free health care funds in ways that maximize your tax benefits!
Hybrid Long-Term Care Insurance Policies: Tax Advantages & Limits
Hybrid Long-Term Care Insurance policies have more limited tax advantages. Hybrid plans are life insurance policies or annuities with riders for long-term care. In addition to the long-term care benefit, there can be a death benefit.
As long as the hybrid policy you own meets federal tax guidelines (IRC Section 7702(b)), a portion of the premium dedicated to long-term care may be deductible.
Are Benefits from Hybrid Long-Term Care Insurance Plans Tax-Free?
Yes, the benefits from hybrid policies, like traditional Long-Term Care Insurance, come tax-free.
However, not every insurance company that offers this type of product can break out the premium in this way. Check with the insurance company to ensure you have a policy that can be broken down in this way.
Chronic Illness Riders in Long-Term Care Insurance Policies
Life insurance policies that have a chronic illness rider (IRC Section 101(g)), only accelerate the death benefit when a person meets the benefit trigger.
These plans lack the consumer protections mandated by tax-qualified Long-Term Care Insurance that meet the rules under Section 7702(b). These plans would not be eligible for tax deductions.
Limited duration, or short-term plans, which provide a one or two-year long-term care benefit, also are not generally deductible. Still, their benefits remain tax-free based on actual expenses being incurred.
Always consult a professional tax advisor to review your specific situation.
Tax Benefits for C-Corps, Pass-Through Corporations and Sole Proprietors
C-Corporations can deduct the total premium from Long-Term Care Insurance as a business expense.
Additionally, the amount paid for the premium for C-Corporations is not considered income. Speak with a tax advisor for details, but this can be an extremely beneficial deduction for many.
For pass-through corporations, S-Corporations, LLCs, partnerships and sole proprietors, the premium for both you and your spouse would be considered a tax-deductible business expense. The amount of the deduction must not exceed the allowable amount.
For clarity, business owners don’t have to offer this benefit to employees. Owners can also provide these benefits to a single person or group based on specific criteria. This relates to the Employee Retirement Income Security Act of 1974.
The cost of the premium paid by a company/employer is NOT considered income. Proceeds from policies are tax-free even if the premium was deducted.
For more, check out our full tax benefit guide below:
ALSO READ: Long-Term Care Insurance Tax Benefits Guide
States are Considering a Tax if You Don't Own a Long-Term Care Insurance Policy
The state of Washington has instituted a tax on those who don’t have a Long-Term Care Insurance policy. Several other states are considering following Washington’s lead and implementing similar taxes.
The tax is on payroll, and is based on total earned income. Individuals are exempt from the tax who own a qualified Long-Term Care Insurance policy.
Several states already offer tax deductions and incentives for Long-Term Care Insurance, on top of the federal incentives mentioned above. The Washington tax is yet another potential incentive on top of these benefits.
Additional details on the Washington tax, which could eventually affect numerous states, is available on our Washington state long-term care resources page.
Make the Most of Your Health Care Tax Benefits in 2024
Knowing the contribution limits for your HSA is only the beginning. Understanding how tax law can assist you in making decisions about your long-term health care is vital to getting the most out of your money.
Long-Term Care Insurance is an affordable alternative to other traditional long-term care payment methods, and can protect your wealth as you age, limiting stress on you and those closest to you.
And maximizing the use of your HSA can allow you tax-free payment for Long-term Care Insurance.
For more information on long-term care in your state, check out our state-by-state guide to long-term care costs, and find additional resources on long-term care near you.
And if you’re thinking about obtaining Long-Term Care Insurance, click below to speak to a Long-Term Care Insurance specialist, who can help guide you in selecting a policy that will meet your needs and educate you on any tax laws that you can benefit from as a result of your policy.
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About the Author
Contributor since April 22nd, 2021
LTC Insurance safeguards your income and assets so you can maintain your lifestyle and preserve your legacy. But, perhaps as important as anything else, Long-Term Care Insurance gives your loved ones the time to be family, reducing the stress and anxiety otherwise placed on them.
The time to obtain coverage is before retirement, ideally in your 40s or 50s, when premiums are lower, and your health is better.
Available Resources on LTC NEWS
LTC NEWS offers several tools and resources to help you in your research for a planning solution or help your family find the appropriate care for a loved one at the time of crisis.
To help you plan for the future costs and burdens of changing health and aging, LTC NEWS can put together several resources, including:
- The LTC NEWS Cost of Care Calculator will show you the financial impact of long-term health care where you live. It will also show you state-specific information on tax benefits, care options, rules, and more.
- The Ultimate Long-Term Care Guide is an outstanding read to help you get a good overview of the topic area.
- Compare the major insurance companies that offer Long-Term Care Insurance products here - Top Insurers for Long-Term Care Insurance | LTC News.
- A detailed tax guide that includes available tax incentives can be found by reviewing the Long-Term Care Tax Benefits Guide.
Find all the resources on LTC NEWS - Resources for Long-Term Care Planning | LTC News.
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