Due to the virus crisis, the deadline for filing your tax return has been postponed to Wednesday, July 15, 2020. The extended filing deadline is still October 15, 2020.
Despite the millions of American families who own Long-Term Care Insurance, not everyone knows the many available tax incentives. If you already own a Long-Term Care Insurance policy or are considering purchasing a plan, you should see if you can take advantage of these tax benefits.
Long-Term Care Insurance has become a very affordable way to protect savings and income from the financial costs and burdens of aging. Because of longevity, more and more people require extended care and help with everyday living activities. Often people require supervision due to cognitive decline. The cost of this care is expensive and generally not paid by health insurance, including Medicareand Medicaresupplements. Medicaid normally requires you to have little or no assets and income in order to qualify for their long-term care benefit.
2020 Tax Focus
To encourage more people to purchase Long-Term Care Insurance tax incentives were put in place. The Internal Revenue Service (IRS) announced its annual inflation adjustments for the tax year 2020 for those who are eligible to deduct the cost of qualified Long-Term Care Insurance policies. This includes the amount eligible to be reimbursed by Health Savings Accounts or an employer-funded Health ReimbursementAccount (HRA).
Long-Term Care Insurance has 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.
An individual is allowed to deduct the cost of their policy (and that of a spouse) as part of their medical expense tax deduction. Medical expenses that exceed 10 percent of adjusted gross income are eligible.
Tax Incentives for Self-Employed and Businesses Available
Those who are self-employed (file a schedule C), or own an LLC, S-Corporation, or C-Corporation have more extensive deductions. This also benefits-eligible spouses.
C-Corporations can deduct 100% of the premium. Otherwise, the IRS publishes a chart each year which indicates the amount deductible based on age. This chart will apply to all other corporations, those who are self-employed, and individuals as part of their eligible medical expenses.
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”.
2020 Tax Deduction Chart
There is a limit on the total amount of the premium which can be deducted. This is based on the age of the taxpayer at the end of the year. The following are the deductibility limits based on premiums paid in the tax year 2020. The IRS uses the same amounts eligible for reimbursement from Health Savings Accounts. These amounts are reflected in the chart below.
The IRS has Increased These Amounts for 2020
|Age at end of 2020||2020 Limit||2019 Limit||2018 Limit||2017 Limit|
|40 or less||$430||$420||$420||$410|
|41 - 50||$810||$790||$780||$770|
|51 - 60||$1,630||1,580||$1,560||$1,530|
|61 - 70||$4,350||4,220||$4,160||$4,090|
|More than 70||$5,430||$5,270||$5,200||$5,110|
NOTE C-Corporations generally have no limit on the amount eligible for deduction. Some states also have tax incentives available.
Benefits Generally Tax-Free
Tax-Qualified Long-Term Care Insurance benefits are generally tax-free. However, some policies pay a cash amount or indemnity once you qualify for benefits. The tax-free maximum allowable amount for 2020 is $370 a day, or the actual cost of care, whichever is higher.
Review additional details on the tax status of benefits received from qualified Long-Term Care Insurance by clicking here.
Health Savings Accounts
More and more Americans now have Health Savings Accounts. The pre-tax money in these accounts can be used to reimburse you for the most qualified Long-Term Care Insurance up to the limits on the above chart.
The amount you can contribute to an HSA in 2020 is going up to $50 for self-only coverage and $100 for family coverage, according to the IRS.
The annual cap in 2020 for HSA contributions will be $3,550 for self-only and $7,100 for family coverage.
Some Hybrid Policies Have Additional Tax Advantages
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 which have a chronic illness rider (IRC 101(g), just accelerate the death benefit when a person meets the benefit trigger. IRC Section 101(g) riders will sometimes provide accelerated death benefits upon either terminal illness or chronic illness. In some cases, they require a chronic illness to be terminal or with zero chance of recovery. 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, but their benefits remain tax-free based on actual expenses being incurred.
Always consult a professional tax advisor to review your specific situation.
Rate Stabilization Rules for Today's Long-Term Care 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 which adds additional rate stability. The chance of future premium increases in the future is small – read the article by clicking here.
Without Long-Term Care Insurance, the costs of extended care are paid through your income and assets or your family will be forced to become caregivers … or both. An advance plan, which includes 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.
The best time to obtain coverage is well before your retirement, in your 40s or 50s, to take advantage of low premiums and most affordable options.
A solid retirement plan should include a plan for longevity and the impact long-term care will have on you, your family, your savings and income, and your lifestyle and legacy. Affordable Long-Term Care Insurance gives you access to your choice of quality care either at home or in a facility.
Long-Term Care Insurance will pay for custodial long-term care. Health insurance, including Medicareand MedicareSupplements, will only pay for a small portion of skilled care. Medicaid will only pay if you have little or no savings and income.
You Must Health Qualify to Obtain Coverage
The underwriting criteria is different with each company. You will have to answer some health questions to even obtain an accurate quote. You ideally want to obtain coverage when you enjoy good health. If you are already receiving care in your home or if you live in a care facility you would be ineligible for coverage. Some policies offer coverage for those with some health issues.
Seek Help of a Qualified LTC Specialist
A Long-Term Care specialist can help you determine your eligibility based on your health history and other factors. Most financial planners and general insurance agents are not knowledgeable about underwriting, features, and benefits, the federal/state partnership program, policy design, and claims.
Find a qualified specialist by clicking here.
LTC NEWS Cost of Care Calculator
Your research should include finding the current and future cost of long-term care services in the area you live – or plan on living in the future. Use the LTC NEWS cost of care calculator by clicking here.
Other research tools are available including the Ultimate Long-Term Care Insurance Guide. Review the guide by clicking here.
Be sure to take advantage of tax incentives that are available to you and plan now for the cost and burdens that come getting older.
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