Long term care insurance tax information - tax deduction long term care insurance - IRS rules long-term care insurance

Long-Term Care Insurance Tax-Deductibility Rules

Recognizing that government can't pay the bill for long-term care, federal and a growing number of state tax codes now offer tax incentives to encourage Americans to take personal responsibility for their future long-term care needs.

If you would like to capitalize on tax advantaged savings available to those purchasing LTC insurance protection, now is the time to start the process. Click here to complete our simple online questionnaire and get the ball rolling.

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) included provisions for favorable tax treatment of qualified Long-Term Care insurance (LTCi) contracts.

The American Association for Long-Term Care Insurance offers this information to help you better understand the various tax implications relating to LTCi policies. This information is provided for informational purposes only and should not be construed as tax advice. Please consult a tax advisor regarding your particular circumstances.

Individual Purchase

AS YOU AGE … YOUR TAX DEDUCTIBLE LIMIT INCREASES

Tax-qualified LTCi premiums are considered a medical expense. For an individual who itemizes tax deductions, medical expenses are deductible to the extent that they exceed 7.5% of the individual's Adjusted Gross Income (AGI). The amount of the LTCi premium treated as a medical expense is limited to the eligible LTCi premiums, as defined by Internal Revenue Code 213(d), based on the age of the insured individual. That portion of the LTCi premium that exceeds the eligible LTCi 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 or any tax dependents (such as parents) as a personal medical expense.

The yearly maximum deductible amount for each individual depends on the insured's attained age at the close of the taxable year (see Table 1 for current limits). These deductible maximums are indexed and increase each year for inflation.

2010 Federal Tax Deductible Limits (Table 1)

Taxpayer's Age At End of Tax Year - Deductible Limit
40 or less  $  330
More than 40 but not more than 50  $  620
More than 50 but not more than 60 $1,230
More than 60 but not more than 70 $3,290
More than 70 $4,110

Source: IRS Revenue Procedure: 2009-50

2009 Federal Tax Deductible Limits

Taxpayer's Age At End of Tax Year - Deductible Limit
40 or less   $  320
More than 40 but not more than 50  $  600
More than 50 but not more than 60 $1,190
More than 60 but not more than 70 $3,180
More than 70 $3,980

Source: IRS Revenue Procedure: 2008-66

2008 Federal Tax Deductible Limits

Taxpayer's Age At End of Tax Year - Deductible Limit
40 or less  $  310
More than 40 but not more than 50  $  580
More than 50 but not more than 60 $1,150
More than 60 but not more than 70 $3,080
More than 70 $3,850

Source: IRS Revenue Procedure: 2007-68

Example: A husband and wife ages 55 and 49 purchase policies. The Eligible amount that the husband can include toward reaching the 7.5% of the Adjusted Gross Income (AGI) threshold is $1,150. The wife (age 49) can apply $580. Note: In two years, when the wife will fall into the 51-to-61 threshold, the higher amounts for both will apply. And, these amounts are increased annually.

Planning Tip: Some LTC insurers offer "shared care" policies where two people share one pool of benefits. This may be used to maximize the eligible tax deductibility when there is a difference in ages between the spouses.

Tax Savings Tip: Long-term care insurance premiums may be paid from a Health Savings Account (HSA) up to the limits shown above.

Taxability of Benefits Received: Generally, benefits received from a tax-qualified LTCi policy that was purchased by an individual are non-taxable and therefore excluded from Adjusted Gross Income. Benefits paid under an indemnity policy are not taxed unless they exceed the higher of the cost of qualified long-term care or $280-per-day (the 2009 limit). The 2010 limit is $290-per-day.

Self-Employed

A self-employed individual can deduct 100% of his/her out-of-pocket long-term care insurance premiums, up to the Eligible Premium amounts listed above [IRC 162(l)]. The portion of LTCi premiums that exceeds the Eligible Premium (see Table 1) amount is not deductible as a medical expense. The deductible amount includes eligible premiums paid for spouses and dependents [IRC 162(l)]. It is not necessary to meet a 7.5% AGI threshold in order to take this deduction.

However, a self-employed individual may not deduct LTCi premiums during any calendar month in which he/she or his/her spouse is eligible to participate in a subsidized LTCi plan (where the employer pays all or part of the premiums for LTCi).

Partnership ² Limited Liability Company (LLC) ² Subchapter S Corporation

Partners is a partnership, members of an LLC that is taxed as a partnership, and shareholders/employees of Subchapter S Corporations who own more than 2% of the Corporation, are taxed as self-employed individuals. The partnership, LLC or Subchapter S Corporation pays the premium.

The partner, member or shareholder/employee includes the LTCi premium in his/her Adjusted Gross Income, but may deduct up to 100% of the age-based Eligible Premium, as listed in Table 1. It is not necessary to meet a 7.5% AGI threshold.

If the sole shareholder/employee purchases LTCi in his/her own name instead of that of the S Corporation, the S Corporation is not treated as a partnership and the shareholder is not treated as a partner. As such, the shareholder is not treated as self-employed and is only eligible to include his/her eligible LTCi premiums in his/her itemized deductions, which are subject to the 7.5% AGI threshold.

Planning Tip: In a sole proprietor or a partnership situation, the owner/partner who has
a spouse who is a true employee can deduct the actual (full) premium for that spouse's policy. If that spouse's policy had a shared benefit rider, that would be included in the deductible premium amount (actual total premium is deductible).

Subchapter C Corporation

When a business purchases a tax-qualified LTCi policy on behalf of any of its employees, or their spouses and dependents, the corporation is entitled to take a 100% deduction as a business expense on the total premium paid. The deduction is not limited to the aged-based Eligible Premiums.

The purchase of a tax-qualified LTCi policy is not subject to any non-discrimination rules, thus allowing an employer to be selective in the classification of employees it elects to cover.

Planning Tip: Premium payments generally will be tax deductible when the class is based on such factors as the officers of the corporation and length of service (e.g. company pays for all those who are Senior Vice President or higher and have been with the company for 12 or more years). Tax rulings have stipulated that the class cannot, however, be based on stock ownership.

Tax Savings Tip: The use of Ten-Pay or Accelerated Premium plans provide higher tax deductions for the Corporation and enable the long-term care insurance premium to be fully paid-up by the time the owner retires (no ongoing premiums) or sells.

Selling Tip: Fiscal Year-End Planning for profitable companies with a retained earnings issue. The fiscal (tax) year for C-Corps generally don't end on December 31st (as they do for 'pass through' entities and individuals). At the beginning of the fourth quarter of their Fiscal Year, profitable companies start looking for tax deductions. Recommend long-term care insurance as an executive benefit … benefits are far more valued than new office furniture.

The premium paid by the business is excluded (not reported) from the employee's Adjusted Gross Income even if the premium exceeds the Eligible Premium amount listed in Table 1.

Employer-Pay Contributory Arrangement on Behalf of an Employee

If an employer pays all or a portion of the tax-qualified LTCi premiums on behalf of an employee, the amount paid is deductible by the employer as a business expense. The deduction is not limited by the age-based limits. The entire employer contribution would also be excluded from the employee's AGI.

If the employer only pays a portion of the premium, the employee is able to apply the balance that he/she pays towards his/her medical expenses, up to the Eligible Premium amount, and would then be entitles to a deduction for medical expenses that exceed 7.5% of AGI.

Gift Tax Exclusion

In addition to the annual Gift Tax Exclusion of $13,000 per donee, a donor has the ability to pay for the medical expenses of the donee [IRC Sec. 2503(e)]. If those medical expenses are tax-qualified LTCi premiums, the exclusion is subject to the age-based limits for Eligible Premium listed in Table 1. An individual (donor) can purchase LTCi policies for family members (donees) and still maintain the annual Gift Tax Exclusion when selecting a Ten-Pay or Accelerated Payment Option.

Return of Premium

The refund is included in the beneficiary's gross income and is taxable, to the extent it was either excluded from the owner's income or deducted by the owner. It must be included as income in the year it is received.

Health Savings Account (HSA)

Tax-qualified LTCi premiums can be reimbursed through an HSA, tax-free up to the Eligible Premium amounts listed in Table 1, even if the HSA is offered through an employer-provided cafeteria plan.

Health Reimbursement Account (HRA)

Reimbursements for insurance covering medical care expenses, as defined in IRC Sec. 213(d), which includes qualified long-term care services and qualified long-term care insurance premiums are allowable under an HRA. Although employers pay for HRAs, an HRA cannot be provided by salary reduction or IRC Sec. 125 plans. As such, the LTCi premiums cannot be paid on a pre-tax basis through an HRA.

Cafeteria Plan

Tax-qualified LTCi premiums cannot be purchased with pre-tax dollars under an employer-provided cafeteria plan. However, LTCi premiums may be paid through an HSA that is offered under an employer-provided cafeteria plan.

Flexible Spending Account (FSA)

Tax-qualified LTCi premiums cannot be reimbursed under an FSA.

If you would like to capitalize on tax advantaged savings available to those purchasing LTC inurance protection, now is the time to start the process. Click here to complete our simple online questionnaire and get the ball rolling.

STATE DEDUCTIBILITY RULES

Many states offer tax incentives to encourage the purchase of LTCi. Below is a general summary of state specific tax information for your reference. This information is current through December 2008 and is subject to change.

Taxpayers may need to meet state specific requirements to qualify for deductions or credits for LTCi. For information regarding the tax liability of a case, consultation with a tax consultant or legal advisor is recommended.

What The Coding Means
* = No Credit Or Deduction. No Broad-Based State Income Tax.
** = Same As Federal Tax Law (see above for details).


AL Deduction for amount of the premium paid for qualifying guaranteed renewable LTCi policy.
AK*
AZ*
AR**
CA Deduction. Max amount deductible based on sliding scale, increased each year to account for inflation. Residents who need LTC services for at least 180 days can qualify for a $500 tax credit as long as their adjusted gross income does not exceed $100,000.
CO Credit for taxpayer & taxpayer's spouse in an amount equal to 25% of total premiums paid during tax year, up to $150 for each policy. Available to taxpayers with federal taxable income <$50,000 or two individuals filing a joint return with taxable income <$50,000 if credit is claimed for one policy, joint filers with income of <$100,000 if credit is claimed for two policies.
CT*
DE**
DC Deduction. Not to exceed $500 per year, per individual for annual premiums paid for LTC.
FL*
GA**
HI Deduction. Same as federal tax law, except subject to 7.5% of HI adjusted gross income, instead of federal adjusted gross income.
ID For taxable years beginning January 1,2004 and after, the full amount of the premium paid by a taxpayer for LTCi which is for the benefit of the taxpayer, a dependent of the taxpayer or an employee of a taxpayer can be deducted from taxable income to the extent the premium is not otherwise deducted by taxpayer.
IL*
IN Deduction up to full cost of premium paid for qualified LTCi for taxpayer and taxpayer's spouse.
IA**
KS For tax years beginning in 2005,a subtraction from federal adjusted gross income for $500 in the tax year 2005, increasing each year by $100 until 2010. After 2010, it is a $1000 subtraction from the federal adjusted gross income for premium costs for qualified LTCi.
KY Deduction from adj. gross income allowed for any amount paid during the tax year for LTC premiums.
LA*
ME Deduction of full premium for individual taxpayers. Applies to premiums paid for LTCi policies that have been certified by the Department of Insurance. Deduction is limited to extent the premiums are not claimed as an itemized deduction on federal tax return. For employers, a credit is allowed against the tax imposed for each taxable year equal to the lowest of the following: (A) $5000; (B) 20% of the costs incurred by the taxpayer in providing LTC policy coverage as part of the benefit package; or (C) $100 for each employee covered by an employer-sponsored LTC policy.
MD Credit. Taxpayer is allowed a one-time credit against the state income tax in an amount equal to 100% of eligible LTCi premium paid. The credit may not exceed $500 for each insured, may not be claimed by more than one taxpayer with respect to the same individual and may not be claimed if the insured was covered by LTCi before July 1 2000. No carryover is allowed. For employers, a credit up to an amount equal to 5% of the costs incurred by the employer during the taxable year for providing LTCi as part of the benefit package. The credit may not exceed $5000 or $100 for each employee covered by LTCi under the benefit package.
MA*
MI*

MN Credit allowed for LTCi premiums equal to the lesser of: (1) 25% of premiums paid to the extent not deducted in determining federal taxable income; or (2) $100.
MS Credit. Equal to 25% of premium costs paid during the taxable year for a qualified policy for self, spouse, parent, parent-in-law, or dependent. The credit cannot exceed $500.
MO Deduction. Taxpayers may deduct 100% of all non-reimbursed amounts paid for qualified LTCi premiums to the extent such amounts are not included in itemized deductions.
MT Deduction for entire amount of qualified LTCi premiums covering taxpayer, taxpayer's parents, grandparents & dependents provided insured is a MT resident. Credit allowed for qualified elder care expenses paid by an individual for care of a qualified family member. Premiums paid for LTCi coverage for qualifying family member are included in qualified elder care expenses. Credit not allowed if premium deduction is taken.
NE**
NV*
NH*
NJ Deduction of LTCi premiums may be taken if they exceed 2% of adjusted gross income and cannot be reimbursed.
NM Deduction for LTCi premiums may be taken if not already itemized on their federal tax return. The following deduction amounts are allowed (married, filing jointly): Adjusted gross income <$30,000,a 25% deduction, $30,000-$70,000,a 15% deduction, and >$70,000, a 10% deduction. Deduction amounts allowed (single or married, filing separately): Adj. gross income <$15,000,a 25% deduction, $15,000-$35,000,a 15% deduction, and >$35,000,a 10% deduction. Deduction amounts allowed (head of household):Adj. gross income <$20,000,a 25% deduction, $20,000-$50,000,a 15% deduction, and >$50,000, a 10% deduction. Same schedule applies for all premiums or LTC services not covered under the federal tax law.
NY Credit for 20% of premium paid for qualifying LTCi premiums. Taxpayer is permitted to carry over to future tax years any credit amount in excess of taxpayer’s tax liability for the year. Employers are eligible for a credit equal to 20% of the premiums paid during the tax year for the purchase of, or for continuing coverage under, a LTCi policy. The credit is not refundable and the credit may not reduce the tax to less than the minimum tax due.
NC Credit allowed for premiums paid on LTCi for taxpayer, taxpayer’s spouse or dependent in an amount equal to 15% of the premium costs, up to $350 for each policy on which the credit is claimed as long as adj. gross income meets the following limitations: Married Filing Separately <$50,000; Single <$60,000; Head of Household <$80,000; Married Filing Jointly or Qualifying Widower <$100,000.
ND Credit allowed for premiums paid on LTCi for taxpayer, taxpayer’s spouse, parent, stepparent or children in an amount equal to 25% of the premium costs, up to $100.
OH Deduction of federally qualified LTCi premiums for taxpayer, taxpayer's spouse and dependents to the extent deduction is not allowed in computing federal adj.gross income.
OK**
OR Credit equal to the lesser of 15% of premiums paid during the tax year or $500 for LTCi coverage for individual, dependent or parents. For employers, a credit of $500 is allowed for each employee covered by an employer-sponsored policy.
PA*
RI**
SC**
SD*
TN*
TX*
UT*
VT**
VA Credit. Taxpayer allowed 15% credit for LTCi premiums paid provided the individual has not claimed a deduction for federal income tax purposes. Any unused credit may be carried over against the income taxes in the next five years or until the full credit is used.
WA*
WV Deduction for LTCi premiums covering taxpayer, taxpayer's spouse, parents and dependents to the extent the amount paid for LTCi is not deducted in determining federal income tax.
WI Deduction allowed for taxpayer & taxpayer's spouse for 100% of the amount paid for a LTCi policy to the extent the same deduction is not taken for federal income tax purposes.
WY*

What The Coding Means
* = No Credit Or Deduction. No Broad-Based State Income Tax.
** = Same As Federal Tax Law (see above for details).

If you would like to capitalize on tax advantaged savings available to those purchasing LTC insurance protection, now is the time to start the process. Click here to complete our simple online questionnaire and get the ball rolling.

Acknowledgements: The American Association for Long-Term Care Insurance wishes to acknowledge John Hancock for permission to use text from their 2007 Federal and State Tax Guide as well as Dave DeBoer, JD, CLU, ChFC, CASL, Advanced Markets, Mutual of Omaha Insurance Company for reviewing this material. Neither these individuals nor companies warrant the information provided herewith. As mentioned previously, always seek the counsel of a professional tax advisor.