Multiple States Considering Implementing Long-Term Care Tax

For decades many states and the federal government have implemented tax incentives to encourage the purchase of Long-Term Care Insurance. Now, twelve states are looking to follow the State of Washington's lead in taxing you if you do not own a qualified Long-Term Care Insurance policy.

Washington residents were given a short period of time to have a qualified Long-Term Care Insurance policy in place to avoid the payroll tax of 58 cents on very $100 earned. However, Gov. Inslee signed into law on January 27, 2022, delaying the program's implementation until July 1, 2023. The state will not give residents more time to obtain coverage to avoid the tax.

Those who do not own a policy will have a state-supplied benefit of $36,500 of lifetime benefits to pay for extended care needs. Considering that Washington is one of the country's most expensive states for long-term health care, according to the LTC NEWS Cost of Care Calculator, the state plan is hardly a plan for long-term care, and critics call it a cash grab. 

For example, Seattle's average cost of in-home care is around $6700 a month (based on a 44-hour week). Nursing homes in Seattle average nearly $12,000 a month, but the cost is expected to average nearly $23,000 a month in twenty-five years.

State Budget Pressure Due to Medicaid Spending Reason for Tax

The tax is intended to help fund the Medicaid program, the country's primary payor of long-term health care expenses. You must have little or no income and assets to qualify for Medicaid. Many people fail to plan for long-term health care. There will be future declines in a person's health due to illness, accident, or the impact of aging. As a result of the consequences of aging, many people will need help with daily living activities or supervision due to dementia. Having no long-term care plan means they must pay for their own care or have family members become caregivers. 

The stress on Medicaid is tremendous and is expected to grow in the coming decades. There is debate whether Washington, or other states, are interested in promoting Long-Term Care Insurance, but they are interested in finding resources to pay for care for those with little or no assets. 

Now 13 States Discussing New LTC Tax

Now that Washington has taken this action, other states are getting close to implementing their own tax programs. New York, California, Michigan, and Minnesota are the states that look like they will be next in line to add their own LTC tax. California and New York are the closest to being next in line to add a tax if you don't own a Long-Term Care Insurance policy. 

In New York, Senate Bill S9082 will authorize a similar plan to Washington; however, they would not allow a large window for people to purchase LTC Insurance. The bill requires coverage to be in place before the law goes into effect:

BEGINNING NO LATER THAN JANUARY FIRST OF THE YEAR IN WHICH THIS ARTICLE TAKES EFFECT MAY APPLY FOR AN EXEMPTION

The law will require that any employed individual who drops their Long-Term Care Insurance notify the state. That person will then be required to pay the tax. Payroll deductions would begin two years after the law is adopted. 

In California, the state established a task force to explore, develop and implement such a tax plan. The California Department of Insurance has details on the proposals. According to several sources in Sacramento, the rollout could be as soon as 2023.

California is debating several proposals, including one offering $144,000 in long-term care benefits funded by a payroll tax on both employers and employees. However, the most likely option will be a plan similar or identical to the State of Washington's plan.

Politics and California

However, California politics may play a role in the timing of a potential tax program. Speaking on the condition of anonymity, a state senate source told LTC NEWS that Gov. Gavin Newsom's possible presidential run could "speed up" this program or slow it down. 

California Gov. Gavin Newsom is reportedly considering entering the race for the Democratic nomination for president in 2024 if President Biden decides not to run. The source says the governor may not want to deal with the tax in the middle of a presidential campaign.

President Biden has not ruled out a run for a second term; however, many observers think he will not run. If the president does not run for reelection, that will open up the field for Democrats for the nomination.

Any tax in California would be on earned income, including bonuses, vacation time, and the value of annual stock grants. Most likely, anyone who owns and maintains a qualified Long-Term Care Insurance policy can opt out of the tax. 

It appears California, like Washington, will allow a small period of time for individuals to get in force Long-Term Care Insurance to avoid the tax. There is some discussion about allowing an annual opt-out if a resident obtains qualified Long-Term Care Insurance coverage; however, according to sources, there is only a slight chance that it will appear in the final legislation.

In addition to California, Michigan, Minnesota, and New York, the other states that are beginning the process include:

• Alaska

• Colorado

• Hawaii 

• Illinois 

• Missouri 

• North Carolina

• Oregon

• Pennsylvania

• Utah 

Pennsylvania is the latest state where legislation was introduced in the state legislature. The bill is almost identical to the law that now exists in the State of Washington.

One question is whether the states will give their residents any advance notice to obtain Long-Term Care Insurance to avoid the tax. It generally takes six to eight weeks to apply and get approved for coverage. Many people in Washington ran out of time to obtain Long-Term Care Insurance to avoid the tax. Since the tax is on all your earned income (no cap), you pay more tax as you make more money. 

New York and California Closest to LTC Tax

Both California and New York are seen as closest to implementing their long-term care tax. Both appear similar to Washington's tax on all earned income for all W-2 employees. Those who do not own a qualified Long-Term Care Insurance policy will have a limited benefit to help pay for long-term health care costs.

The cost of care in both states is very expensive, and neither plan provides much money to pay for long-term health care services. The tax, however, can become very expensive.

The states may provide little or no time for consumers to purchase Long-Term Care Insurance to avoid the tax. Residents of all these states are encouraged to obtain coverage now to ensure the ability to get real coverage for long-term care and avoid the tax.

New York Plan

It appears that you will need to have a qualified Long-Term Care Insurance policy in force before the proposal becomes law. If you wait too long, your ability to avoid the tax will disappear. 

Local politics was thought to play a role in New York. However, Gov. Kathy Hochul beat her Republican challenger, Lee Zeldin. The election ended the likelihood of strong opposition to the tax. The Democrats have held a majority in the New York State Assembly since 1975. They have maintained a majority in the state senate since the 2018 elections.

New York Tax Could Be Higher

If the current proposal becomes law, the tax may be more expensive than Washington's. The New York plan includes national coverage, whereas the Washington plan requires that care be provided in the state. The New York plan will also pay benefits for care received during the claim process; the Washington plan does not.

The tax in New York could be as high as .99% on 100% of earned income. That rate would make it a costly tax that would make Long-Term Care Insurance a bigger value for upper-middle-class and upper-class individuals. 

Younger Workers Must Pay Tax

While most experts suggest planning for the costs and burdens of aging as part of retirement planning, the tax in these states may force people, even younger ones, to obtain coverage. Otherwise, these individuals will pay a tax for the rest of their lives. 

Younger people who expect to earn more money throughout their lifetime should consider obtaining coverage now. Life insurance policies with a qualified rider for long-term care (meeting the legal requirement under Section 7702(b) of U.S. Code) are affordable. These life plans meet a critical need for life insurance in addition to the qualified long-term care benefit exempting them from the tax.

Understand that long-term health care services are expensive and are increasing every year. Traditional health insurance does not cover these costs, including Medicare and supplements. 

The LTC NEWS Cost of Care Calculator shows the current and expected future cost of care services nationwide based on the major cities throughout each state - Cost of Care Calculator - Choose Your State | LTC News.

When you obtain LTC Insurance coverage, try not just to purchase the smallest plan available. With an affordable Long-Term Care Insurance policy, you safeguard income and assets from the tremendously expensive costs of extended care. But there is more. You will have access to your choice of quality care services, including in-home care, without burdening your family. Consider it partly as insurance for your 401(k) and other retirement accounts.

Select a Qualified Policy That Meets Federal Code 7702(b)

Since there may be little or no advance notice before a state enacts a tax, don't delay obtaining coverage. You must have a tax-qualified Long-Term Care Insurance policy following Section 7702(b) of the U.S. Code. 

Seek the assistance of an experienced Long-Term Care Insurance specialist representing the top companies. Premiums can vary over 100% between companies for the same coverage. LTC Insurance is medically underwritten. The specialist will match your age, health, and family history with the right company - Work With a Specialist | LTC News.

It might be tempting to obtain the smallest plan possible that gets you out of the tax. It would be wise to avoid getting the cheapest available plan unless you have little income and don't expect to earn more in the near future.

You can replace or add to your coverage when you start earning more income, but remember, the coverage would be priced based on attained age and health.

Some LTC Insurance policies lack inflation benefits and are not partnership certified. These two items are essential to have in a policy. Few employer-sponsored plans exist, and those that do are usually not your best option unless you have health issues limiting your choices. 

No New Federal Plan on the Horizon

Don't wait for Washington DC to get involved. President Biden has talked about expanding tax incentives if you purchase a policy; however, Congress has little support to do anything more than what they have already done.

While there have been proposals to enact some national plan, there is little support. Several strategies have been proposed, from a national long-term care plan to allowing the use of qualified retirement funds penalty-free to pay for LTC Insurance premiums. 

Federal Tax Incentives Exist. Partnership Plans in Most States Available

The existing federal tax benefits will continue. The Long-Term Care Insurance Partnership program offers additional dollar-for-dollar asset protection if you own a qualified plan. Most states participate in the partnership program.

The risk of needing long-term health care is real at some point in your life, and the states lack the funds to pay for everyone's future care. Being prepared is a good idea - tax or no tax. 

In a speech on October 28, 2021, President Biden said that millions of Americans in the so-called "sandwich generation" feel financially squeezed by raising a child and caring for an aging parent simultaneously. Describing this as a family crisis is not an exaggeration. The consequences of long-term health care are real.

Long-Term Care Insurance is medically underwritten, so don't delay obtaining coverage. Delaying could not only affect the tax in your state but could impact your insurability.

States are attempting to find ways to address the growing problem of aging and long-term care. Many experts think more states will devise similar long-term care tax programs in the years ahead. Meanwhile, being proactive in planning is recommended.