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Tax-qualified Long-Term Care Insurance has important tax advantages. Be sure to seek a professional tax advisor for your specific situation.
Federal law provides important tax benefits for qualified Long-Term Care Insurance. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) included provisions for the favorable tax treatment of qualified Long-Term Care insurance. This includes individuals as well as small and large businesses (S-Corporations, C- Corporations, LLCs, partnerships, and sole proprietors).
For C-Corporations, the total premium is deductible as a business expense. This can be very advantageous if you wish to purchase a single premium policy and get the full tax deduction in one year. Be sure to consult your tax advisor for details.
For pass-through corporations (S-Corps, LLCs, partnerships, and sole proprietors), the premium for both you and your spouse would be considered a tax-deductible business expense. The amount of the deduction must not exceed the allowable amount. The Internal Revenue Service publishes these maximum amounts based on age each year.
In all cases, Long-Term Care Insurance is exempt from the Employee Retirement Income Security Act of 1974 (ERISA) rules. This means a business owner does not have to offer this benefit to employees. A business owner can also set-up executive carve-outs and offer this benefit to any one person or group of people based on any criteria they decide.
Proceeds from tax-qualified Long-Term Care Insurance come tax-free. Click here for details: www.ltcnews.com/resources/faq/reporting-benefits-from-a-insurance-policy
This chart shows the various options for federal tax-incentives:
Health Savings Accounts
An individual with a Health Savings Account can use the pre-tax money in their HSA to pay or reimburse themselves for tax-qualified Long-Term Care Insurance premiums. Be careful: This is not the case for Flexible Spending Accounts (FSAs). Often individuals will confuse an FSA with HSA. The FSA is a tax-advantaged benefit program established by employers for employees’ qualified health-related expenses. Unlike the Health Savings Account (HSA), the FSA is a “use it or lose it” account and Long-Term Care Insurance is NOT an eligible expense.
An HSA holds money you get to keep, and tax-qualified Long-Term Care Insurance premiums qualify as an eligible expense. Any money left over in these accounts at age 65 gets converted to an IRA.
Individual Tax Payer Deduction
Premiums for tax-qualified Long-Term Care Insurance are considered a medical expense on your individual return. For people who itemize their tax deductions, medical expenses are deductible to the extent that they exceed the current amount required to meet their Adjusted Gross Income (AGI).
The amount of premium that can be treated as a medical expense (and therefore deducted) is limited. The eligible amount is defined by Internal Revenue Code 213(d), and is based on the age of the insured individual(s). The portion of the premium, if any, that exceeds the eligible premium is not included as a medical expense.
Individual taxpayers can treat premiums paid for tax-qualified Long-Term Care Insurance for themselves, their spouse/partner or any tax dependents (such as parents) as a personal medical expense.
The yearly maximum deductible amount for each person is based on the person’s attained age at the close of the taxable year (see table for current limits). These deductible maximums are indexed and increase each year for inflation. Some people may not qualify for a tax deduction when they are younger, but may become eligible as they age.
This is the same chart used for eligible Health Savings Account payments/reimbursements. However, you can’t take both a tax deduction AND use pre-tax money from your HSA. It is either one or the other. Again, seek a qualified tax advisor to assist you.
Long Term Care Insurance Federal Tax-Deductible Limits
|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 60||$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|
Some States Offer Tax Deductions or Credits
In addition to the federal tax incentives that are available, many states offer tax benefits as well. Find if your state offers tax incentives here: www.ltcnews.com/resources/states/compare