Tax-qualified Long-Term Care Insurance has significant tax advantages for both individuals and businesses, including the self-employed. Be sure to seek a professional tax advisor for your specific situation.
Federal law provides these 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).
C-Corp Benefits in Long-Term Care Insurance
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 C-Corp owners, the ability to deduct the full premium for Long-Term Care Insurance gives you significant tax benefits. Generally, you can deduct the full amount of the premium no matter the size of the premium. Not only is this a tax deduction, but the amount paid for the premium also is not considered income.
Some companies offer single premium Long-Term Care Insurance. With one single premium, you can plan for future long-term care costs in addition to taking advantage of a tax deduction.
One company offers a single premium tradition Long-Term Care Insurance option (National Guardian). The company also offers a ten payment schedule and a return of premium option at additional cost.
Hybrid Long-Term Care Insurance (life insurance with a rider for long-term care) is also a single premium payment (although limited payment options are also available). However, several companies can separate the life portion of the premium from that of the long-term care portion. This gives the C-Corp owner the ability to deduct the long-term care portion of the policy. Life insurance paid by a company is considered ordinary income for the employee, but not the case for long-term care.
Long-Term Care Insurance: Pass-Through Corporations and Sole Proprietors
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 provide this benefit for any one person or group of people based on any criteria they decide.
The cost of the premium paid by a company/employer is NOT considered income. Proceeds from policies are tax-free even if the premium was deducted.
This chart shows the various options for federal tax-incentives:
Can an HSA Pay for Long-Term Care Insurance?
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 the money in the account, and you get to keep it. The money grows tax-deferred. Money taken out of the account is tax-free if used for a health-related expense, 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. The money at that point can be used for anything; however, if used for health-related expenses, including LTC Insurance premiums, the money comes out tax-free.
Individual Taxpayer Deduction and Long-Term Care Insurance
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.
Legislation has made the 7.5% AGI limit permanent. The new Consolidated Appropriations Act for 2021 (H.R. 133), signed into law on December 27, 2020, permanently set the medical expense deduction floor at 7.5% for all taxpayers. unless you qualify as a business deduction.
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 get older.
The same chart is used for both eligible Health Savings Account payments/reimbursements and tax deductions. 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
Some States Offer Tax Deductions or Credits in addition to the available federal tax incentives; some states offer tax benefits as well. Find if your state offers tax incentives here.
|Age at end of 2024||2024 Limit||2023 Limit||2022 Limit||2021 Limit|
|40 or less||$470||$480||$450||$450|
|41 - 50||$880||$890||$850||$850|
|51 - 60||$1,760||$1,790||$1,690||$1,690|
|61 - 70||$4,710||$4,770||$4,510||$4,520|
|More than 70||$5,880||$5,960||$5,640||$5,640|
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