Long-Term Care Insurance Tax Deduction Limits Increase for 2023 - IRS Reveals Schedule Based on Age
As interest in long-term health care planning increases, the IRS has raised the tax incentives available for Long-Term Care Insurance for the tax year 2023. These tax incentives make LTC policies even more affordable for many Americans.
In an inflationary time, extra tax incentives are always welcome. Tax incentives are one of the least known benefits of Long-Term Care Insurance. For 2023 the maximum amount taxpayers can write off as owners of qualifying LTC Insurance, based on an age scale, has increased across the board, according to the Internal Revenue Service. For those who have Health Savings Accounts, the same amounts are used to determine the maximum amount available for reimbursement of Long-Term Care Insurance premiums using the pre-tax funds in the account.
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.
Tax-deductible limits for 2023 will increase between 6 and 7 percent. Those who are self-employed or own businesses can take advantage of the tax deductions when they purchase coverage. Most people obtain Long-Term Care Insurance in their 50s. However, the deduction amounts are more modest at younger ages, but the premiums are also much lower when you get coverage when you are younger.
Older You Get the Higher the Deductible Amount
However, the limits get more generous when you get older, allowing individuals a better chance of deducting their premiums. Jesse Slome, the American Association for Long-Term Care Insurance director, says that only tax-qualified Long-Term Care Insurance can qualify for the potential deduction.
Individuals who purchase larger, more costly policies or buy plans at older ages can take advantage of the much larger tax-deductible limits available.
One of the little-known benefits for certain Long-Term Care Insurance is the ability to deduct some or all of the cost during retirement years.
For individuals aged 50 through 60, the eligible premium for a deduction goes from $1690 for the tax year 2022 to $1790 in 2023. The deduction is lower at younger ages but increases after age 60.
However, not all policies have tax incentives. Slome says that many linked benefit or hybrid life insurance policies do not qualify for a possible tax benefit (see section below).
IRS 2023 Tax Deductibility Amounts
The deductions apply for self-employed taxpayers, including LLC, PA, S-corporations, and partnerships; the 2% or more owners of these entities can deduct 100% of the eligible (age-indexed) premiums paid on their behalf, their spouses, and dependents.
Long-Term Care Insurance premiums paid on behalf of non-owner employees, their spouses, and their dependents are generally fully tax-deductible as a reasonable business expense.
Again, only qualified Long-Term Care Insurance policy premiums are eligible. The age-indexed chart below shows the maximum amount eligible for the deduction (per person). This same chart is used for maximum health savings account reimbursements.
Attained Age Before Close of Tax Year
2021 Tax Year
2022 Tax Year
2023 Tax Year
40 or younger
71 and older
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 of $420 a day for the tax year 2023. Unless there are bills to support the higher amount, benefits over that amount are subject to taxation.
Health Savings Accounts
The IRS announced earlier that the health savings account (HSA) contribution limits will increase significantly for 2023 in response to the recent spike in inflation. Those individuals who own qualified Long-Term Care Insurance can use the pre-tax money in their HSA accounts to reimburse themselves the cost of their LTC Insurance premium.
The reimbursable amount through an HSA is based on the same LTC Insurance allowed tax deduction aged-based IRS chart. However, you cannot take both a tax deduction AND use pre-tax money for Long-Term Care Insurance. The taxpayer must select one or the other.
Many employers are offering Health Savings Accounts to lower the cost of health insurance for their employees. Many people are unaware that the pre-tax money in a Health Savings Account can pay for qualified Long-Term Care Insurance premiums.
For 2023 you can contribute $3,850 for individual coverage or $7,750 for family coverage. For those age 55 and older, you are allowed an additional $1000 contribution for 'catch-up.'
In addition to Long-Term Care Insurance premiums, Health Savings Account funds can be used to pay for qualified medical expenses like deductibles, prescriptions, and over-the-counter medications.
Money from an HSA is tax-free, and money inside the account grows tax deferred. If all the funds are used for qualified health and medical expenses, you never pay any tax on the money.
Employer HSA contributions are not treated as taxable income but do count toward employees' annual contribution limit. Unlike Flexible Spending Accounts, the money in an HSA account is yours forever, and you are not required to spend all the money by the end of each year.
What Happens with an HSA After Age 65?
Once you turn 65, you can use the funds in the HSA in any way you wish. You can still use the money for qualified health and medical expenses tax-free, but you are no longer required to do so.
If you use funds for any other purpose, the money coming out would be considered taxable income.
However, many people continue to use their HSA funds for health and medical expenses. In addition to Long-Term Care Insurance, you can use the money for the following:
IRS-qualified health care premiums for Medicare Parts B, C, and D,
Medicare deductibles, co-pays, and co-insurance,
dental and vision expenses,
insulin and diabetic supplies, and
over-the-counter medicine and medical equipment and supplies.
Some Hybrid Policies Have Additional Tax Advantages
Hybrid Long-Term Care Insurance policies have more limited tax advantages. These plans are life insurance policies or annuities with riders for long-term health care. In addition to the long-term care benefit, there is a death benefit.
If the hybrid LTC policy you own meets federal tax guidelines (IRC Section 7702(b), a portion of the premium dedicated to long-term care may be deductible. The benefits of hybrid policies, like traditional Long-Term Care Insurance, are tax-free.
Not every insurance company that offers this type of product can break out the premium in this way. Check with the insurance company.
Life insurance policies with a chronic illness rider (IRC Section 101(g), only accelerate a portion of the death benefit when a person meets the benefit trigger. These policies are not eligible for any tax deduction.
IRC Section 101(g) riders sometimes provide accelerated death benefits for terminal or chronic illnesses but don't include the consumer protections, regulated benefit triggers, and tax incentives that qualified Long-Term Care Insurance offers.
Limited duration, or short-term plans, which are cash indemnity policies that provide one or two-year benefits, 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.
A Tax if You Don't Own a Long-Term Care Insurance Policy?
Several states are considering joining the State of Washington by adding a payroll tax based on total earned income unless you own a qualified Long-Term Care Insurance policy.
In Washington, unless you have a qualified LTC policy, the tax will also make you eligible for a very minimal state-provided benefit - click here to read more on the Washington page of LTC NEWS.
Multiple states are considering adding their version of the LTC Tax. However, some states may not offer residents a window to purchase policies before instituting the plan.
Rate Stabilization Rules for Today's LTC Insurance
Today's Long-Term Care Insurance is not only affordable but is rate stable. Rate stabilization rules are in place in most states. Find your state by clicking here.
Today's policies are priced based on the extreme low-interest-rate environment that adds additional rate stability. The chance of future premium increases is small – read the article by clicking here.
Hybrid Long-Term Care Insurance either has one 'single' premium (no rate increase possible) or premiums that can be annualized for life or for a period of years. Hybrid premiums cannot increase by contract.
Your Responsible for Most Long-Term Health Care Costs
Without Long-Term Care Insurance, you will pay for future long-term health care from income and savings, or your family will become caregivers. In some situations, you may have both paid care and family caregivers. Neither option is ideal, and the consequences on family and finances can be enormous.
Affordable Long-Term Care Insurance safeguards your retirement accounts (401(k), IRA, SEP) and other assets as it reduces the stress otherwise placed on your family members.
Traditional health insurance, including Medicare and supplements, will only pay for a small amount of skilled care and nothing toward custodial care, which is the type of care most people will require. Medicaid will pay for long-term care services if you have little or no income or assets.
Cost of Long-Term Health Care Depends on Where You Live
Increasing demand for long-term care services, inflation, and higher labor costs make the financial impact of future care even greater. The cost of long-term care services is rising rapidly nationwide.
The cost of care services varies depending on where you live and the type of services you require - LTC NEWS Cost of Care Calculator.
Premiums are based on several factors, including the age at the time you purchase coverage, health, family history, and the total amount of benefits purchased. Premiums for the same benefits can vary over 100% between insurance companies.
Several insurance companies offer these products and must file their products and premiums with the insurance department in each state. No individual agent, agency, or advisor can provide a consumer with discounts that are not filed with the insurance department.
LTC Specialists Can Be Very Helpful in Finding Affordable Coverage
The younger you get your coverage, the lower the premium will be. However, there are many options and types of available plans, that are available. Seek a qualified Long-Term Care Insurance specialist to help you navigate these options and help you find the best coverage at the best value.
You can find a trusted and experienced LTC Insurance specialist by clicking here.
Protecting Assets and Accessing Quality Care
American families can protect their income and assets while lessening the stress and burden that would otherwise fall on their loved ones through a Long-Term Care Insurance policy.
An LTC Insurance policy pays for all levels and types of care, including in-home care. While some think these policies are "nursing home" plans, most benefits are paid outside of a nursing home.
Policies pay for adult day care centers, assisted living facilities, memory care, and, most importantly, in-home care.
Studies over the last decade show that nearly half of Americans who reach 65 will need some form of assistance to take care of themselves. Once a person reaches age 40, they start seeing changes in their health, and their bodies begin to deteriorate. At older ages, we start seeing a decline in our cognitive skills as well.
Long-Term Care Affects Families and Finances
You can see why the federal government and many states offer tax incentives to help you buy a qualified Long-Term Care Insurance policy, given how many individuals require such services.
But not everyone is aware of the federal and state tax benefits that make owning these plans even more affordable.
The problem of long-term health care is both a cash flow issue and a family issue. Owners of Long-Term Care Insurance can access their choice of quality care services, protecting income and assets, preserving their lifestyle, and maintaining their legacy.
However, it also allows your loved ones to have the time to be family instead of caregivers. If you are eligible for tax advantages, use them to make your policy even more affordable.
About the Author
An LTC News author focusing on long-term care and aging.
Contributor since August 21st, 2017
How can you plan for the costs and burdens of aging? The solution for many families is affordable Long-Term Care Insurance. An LTC policy will provide you with guarantees that give you and your family peace of mind. When you own a policy you have guaranteed tax-free resources to pay for your choice of quality care in any setting, including in-home care.
Consider LTC Insurance as 401(k) insurance, but it is much more than that. Long-Term Care Insurance shields your loved ones and finances against the expenses and hassles of aging and failing health so they can remain family and not become caregivers.
When to Obtain LTC Coverage
Long-Term Care Insurance is medically underwritten, and each company has its own underwriting criteria. Generally, you will have better health when you are younger. Most people obtain coverage in their 50s.
An LTC Insurance specialist will work with all the top companies and understands underwriting, policy design, and claims - Work With a Specialist.
Tools and Resources Available on LTC NEWS
There are a variety of tools and resources that LTC NEWS offers that can help you in your research:
The Ultimate Long-Term Care Insurance Guide - If you like details, you will enjoy this comprehensive guide to LTC Insurance.
Long-Term Care Guides - LTC NEWS has several other guides that can help you plan or find quality care.
Cost of Care Calculator - Choose Your State - You can find the current and future cost of long-term health care services where you live.
Frequently Asked Questions - Get the answers to the most often asked questions about long-term health care planning and LTC Insurance.
Filing a Long-Term Care Insurance Claim - Does a loved one - like your Mom or Dad - have a Long-Term Care Insurance policy and need to file a claim to get benefits? LTC NEWS will help. If they don't have a policy, but you need help in getting a plan of care and finding caregivers, LTC NEWS can also assist.
Reverse Mortgages - Learn about reverse mortgages and ask questions about how they work and if you or a loved one would benefit from one.
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