Long Term Care Insurance is a product many Americans have in place to safeguard current or future retirement income and assets from the high costs of extended Long Term Health Care. These policies are also tax deductible.
The 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 a 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 2017.
“The tax-deductibility of premiums when you purchase traditional Long Term Care insurance provides a real incentive for consumers, especially after retirement,” explains Jesse Slome, director of the American Association for Long-Term Care Insurance (AALTCI).
“The special tax advantages are not available when individuals purchase linked-benefit products such as life insurance or annuity policies that can provide a future Long Term Care benefit,” Slome said.
These “hybrid” plans generally offer single premiums with some type of death benefit. The benefits are generally tax-free but premiums are generally not deductible. There are some exceptions and you should consult a Long Term Care Insurance specialist for details on those exceptions.
With increased longevity and advances in medical science more people will require help with everyday activities. These “ADL’s – Activities of Daily Living” are things we take for granted like bathing, eating and dressing. People require extended care due to accidents, illnesses or the impact of aging. Health insurance or Medicare will only pay for a small portion of skilled care and they pay nothing toward the most common “custodial” care (help with ADL’s or supervision due to memory issues like Alzheimer's or dementia). LTC insurance will pay for these costs.
“Only traditional Long Term Care insurance policies have the benefit of potentially being tax-deductible to an individual. After retirement when income typically declines, tax deductions can take on a significant added value to take advantage of,” said Slome.
Proceeds from LTC insurance are always tax-free.
Starting in 2017, all individuals may deduct qualified medical expenses that exceed 10 percent of adjusted gross income (AGI) for the year. For 2016, individuals age 65 and older the threshold remains at 7.5 percent of AGI.
Premiums paid for traditional LTC insurance are included in the term ‘medical care’ when itemizing on a personal return. You should seek tax advice if you are self-employed or own a corporation as deductions are more favorable. The following are the just announced 2017 limits:
|Attained Age Before Close of Taxable Year||2017 Limit||2016 Limit|
|40 or less||$410||$390|
|More than 40 but not more than 50||$770||$730|
|More than 50 but not more than 60||$1,530||$1,460|
|More than 60 but not more than 70||$4,090||$3,900|
|More than 70||$5,110||
Source: IRS Revenue Procedure 2016-55 (2017 limits) and 2015-53 (2016 limits)
Experts suggest that over 5 million people who Itemize medical costs could deduct Long Term Care Insurance premiums.
The IRS allows individuals to deduct medical expenses including preventative care, dental and vision care, prescription medications, glasses, contacts and hearing aids. Slome says many seniors have medical expenses that don’t meet the threshold but when the cost of LTC Insurance is included, the threshold is exceeded providing a significant tax deduction.
“This is a real benefit for the 23 million individuals age 65 or older who file federal tax returns. The AALTCI analyzed IRS reports for the latest tax year (2014) and nearly 5.1 million tax filers who reported income of between $40,000 and $100,000 reported medical expenses in excess of the AGI limits. For those who are retired the combination of reduced income and increased medical costs means the cost of traditional Long Term Care Insurance can be all or mostly tax deductible,” said Slome.
The self-employed or those who own a business the premium can be a tax-deductible business expense. People who have Health Savings Accounts (HSA) can also use pre-tax money to pay for premiums. Plus, some states offer tax deductions or credits as well. In addition, most states of Partnership plans which provide additional dollar-for-dollar asset protection if you have a partnership policy in place.
The American Association for Long-Term Care Insurance advocates for the importance of planning and supports insurance and financial professionals who provide LTC financing solutions. They suggest speaking with a specialist who can assist you in planning and providing options and quotes. Visit the organization’s website (www.aaltci.org) or call the organization at 818-597-3227. The AALTCI says there is no-obligation to the consumer for these services.