If you are a member of Generation X, a Late-Boomer or a Baby Boomer, you probably have some experience with a person you know who needs or needed help with activities-of-daily living or supervision due to memory loss. These long-term care services and supports are expensive and the stress and burdens on loved ones are high.
These are reasons why Americans are turning to Long-Term Care Insurance to provide the resources for quality care in the setting they desire. This way they can safeguard their retirement accounts and reduce the tremendous stress placed on family members.
This is why the federal government, and some states, offer tax incentives to encourage consumers to purchase and maintain Long-Term Care Insurance. Extensive tax incentives exist for many people.
While the Trump Administration, and others in Washington, have flirted with additional tax incentives, the ones that are available are still significant. The Internal Revenue Service (IRS) has announced the 2019 tax deduction schedule for Long-Term Care Insurance.
These insurance policies have attractive tax treatment under IRC 7702(b). Premiums can be tax deductible if you have enough medical related deductions, you are self-employed or own an LLC, S-Corporation or C-Corporation.
C-Corporations can deduct 100% of the premium. Otherwise, the IRS publishes a chart each year which indicates the amount deductible based on age.
The IRS has Increased These Amounts for 2019
|Attained Age Before Close of Taxable Year||2019 Limit||2018 Limit||2017 Limit|
|40 or less||$420||$420||$410|
|More than 40 but not more than 50||$790||$780||$770|
|More than 50 but not more than||1,580||$1,560||$1,530|
|More than 60 but not more than 70||4,220||$4,160||$4,090|
|More than 70||$5,270||$5,200||$5,110|
Jesse Slome, executive director of the American Association for Long-Term Care Insurance (AALTCI), a national consumer education and advocacy group, notes that the special tax advantages approved by the IRS are only available with tax-qualified health-based Long-Term Care Insurance.
Other types of policies exist which have more limited tax advantages including asset-based or “hybrid" policies. These plans are life insurance policies or annuities with riders for long-term care. In addition to the long-term care benefit, there is a death benefit. Since these plans follow federal tax guidelines (IRC 7702(b), a portion of the premium dedicated to long-term care may be deductible. Benefits, like traditional Long-Term Care Insurance, come tax-free.
However, life insurance policies with a rider for long-term care, which require a person to be terminal before qualifying for long-term care benefits have no tax deductibility.
Limited duration, or short-term plans, which provide a one or two-year long-term care benefit also are not deductible, but their benefits remain tax-free.
“When you are younger and working, the (tax) benefit is nominal if any but once you retire and may have other health expenses, the tax savings benefits could be huge,” Slome explained,
According to the AALTCI analysis, many older Americans who have health expenses can add their Long-Term Care Insurance premium costs to qualify for the IRS approved deductions.
Those people who are self-employed or own a business can deduct the premium as a business expense. Benefits remain tax-free even if you take a tax deduction. If you have employees, unlike other insurance benefits, you do not have to offer the benefit to anyone but you can elect to offer to certain individuals as a “golden parachute”.
If you have a Health Savings Account you may use the pre-tax money in that account to reimburse yourself the cost of the premium, up to the IRS tax-chart above. You cannot, however, take a tax deduction and use pre-tax money in a Health Savings Account.
You can find the tax incentives available, including the cost of care and other information on Long-Term Care in your state by clicking here.
Experts suggest planning for the financial costs and burdens of aging prior to retirement when you normally have better health and premiums are very affordable. The costs of long-term care services can drain retirement savings. Many policies include professional case management. This helps the family find quality caregivers and develop an appropriate plan of care. This reduces the amount of burden that is otherwise placed on the family.
Today’s Long-Term Care Insurance is not only affordable but is rate stable. Rate stabilization rules are in place in most states. Plus, today’s policies are priced based on the extreme low-interest rate environment. The chance of future premium increases in the future is small – read the article by clicking here.
If you have a Long-Term Care policy already be sure to tell your tax advisor. Otherwise, seek the help of an experienced Long-Term Care specialist. They can help shop for the best coverage and design an appropriate plan based on your age, health, financial plan, and concerns. Few financial advisors or general insurance agents have this level of experience or knowledge. In addition, 45 states offer special Long-Term Care Partnership policies which provide additional dollar-for-dollar asset protection.