What You Should Know About LTC Deductions

What You Should Know About LTC Deductions 
 Long-term care insurance has become increasingly important as the first wave of baby boomers turn 65. When advising clients about this much-misunderstood product, consider the variety of tax advantages that can come with LTC policies.

For individuals who itemize their tax deductions, LTC insurance premiums can be deducted as a medical expense. But as with all medical-expense deductions, only those that exceed 7.5% of adjusted gross income are deductible.

There’s also a maximum deductible amount, depending on the person’s age at the end of the calendar year. For 2012 taxes (increases every year), $660 for ages 41 to 50, $1,310 for ages 51 to 60, $3,500 for ages 61 to 70, and $4,370 for people over 70. These limits increase annually.

If there is an age difference between spouses, they can maximize the deduction with a “shared-care” LTC policy, which allows couples to divide benefits as needed. For example, if the husband uses three years of benefits in a 10-year shared-care plan, the wife retains the remaining seven.

In addition, those in a high deductible health insurance plan with a Health Savings Account can use the HSA to pay their LTC insurance premiums.

But if an employer pays all or even part of the premiums, the employee is not eligible for these deductions unless he or she is part owner of a partnership, LLC or Subchapter S Corporation. If the partner’s spouse is an employee of the partnership, the full premium on the spouse’s policy can be deducted, too.

LTC insurance benefits are never considered taxable income if they are used for legitimate long-term-care expenses, such as nursing homes or, in many cases, home-based assistance.

Deductions For Small Businesses
Small business owners can deduct the cost of LTC insurance for themselves, their spouses and other dependents. As a business expense, it’s 100% tax-deductible.

Business owners should also know that LTC insurance can be offered to select employees, their spouses, and even retirees. Business owners can set the rules that determine who is covered and who isn’t.

If LTC insurance is offered to employees, the employer does not have to pay payroll taxes on the premiums. The employees aren’t taxed on the premiums paid by their employers, either.

Self-Employed Clients And Other Special Situations
The rules are somewhat different for self-employed people, who can deduct 100% of their out-of-pocket LTC insurance premiums up to the age-based limits delineated above. For the self-employed, it’s not necessary to meet the 7.5% threshold to take this deduction. The deduction can include spouses and dependents.

A Subchapter S Corporation that buys a policy on behalf of any of its employees or their dependents is entitled to a 100% deduction as a business expense, just like any other type of employer. The deduction is not limited to the age-based cutoff.

And like any other type of employer, the Subchapter S Corporation can be selective in classifying which employees it chooses to cover under the LTC insurance policy.

Naturally, it’s best to consult with qualified accountants and attorneys to make sure your clients are following all the rules and taking advantage of all the tax incentives available.
–– Ben Mattlin
©2011 www.fa-mag.com

Please note: This information is not intended to be a substitute for specific individualized tax advice. Please keep in mind, Insurance Companies alone determine insurability, and some people, for their own health or lifestyle reasons, are deemed uninsurable. Restrictions and limitations apply; including as well as elimination periods before benefits may begin, these vary from policy to policy, details of the policy should be reviewed prior to purchase. 

© Carmen Coleman, President and CEO
Lifetime Financial Group, LLC
30 W. Broad Street, Suite 300
Rochester, NY 14614

Tracking# 1-026899

Federal and State Tax Guide
State Tax Incentives for Long Term Care Insurance

The Basics of Long-Term Care Insurance

Thinking about the need and the costs of long-term care is enough to make anyone uncomfortable. But while it's a difficult subject to talk about, it's also a topic that often generates lots of questions and misunderstanding.

Consider this: The average cost of nursing home care in the United States now exceeds $70,000 per year, with wide ranging variations from state to state.*

Who Pays?
For the most part, those who need long-term care are left to foot the bill on their own. Neither Medicare, nor Medicare supplemental coverage ("Medigap"), nor standard health insurance policies cover long-term care unless you are impoverished. That's why long-term care insurance is so important. Since premium costs are based on your age and health at the time of purchase, the younger and healthier you are when you purchase a policy, the lower the premium you're apt to pay during the life of the plan.

As you evaluate long-term care insurance, keep the following variables in mind:

  • Coverage Parameters. Policies will differ in the types of services they support. Be sure to choose a policy that best meets your particular needs.
  • Benefits Payout. How much does the policy pay per day for care in a particular setting? How does the policy pay out? (e.g., a fixed daily amount, as reimbursement for the cost of care up to a daily maximum?) Does the policy have a maximum lifetime limit?
  • Eligibility. Does the policy use certain "triggers" to determine benefits eligibility, such as the formal diagnosis of an illness or disability? What is the maximum issue age for the policy?
  • Women May Need More. Longer life spans for women may signal the need for additional coverage.
Finally, keep in mind that most long-term care policies sold today are federally tax-qualified, which means premiums paid and out-of-pocket expenses are deductible. Also, long-term care benefits received are not taxed as income up to certain limits.

For more information: Lifetime Financial News

© Carmen Coleman, President and CEO
Lifetime Financial Group, LLC
30 W. Broad Street, Suite 300
Rochester, NY 14614

Tracking # 670203

*Source: AARP, 2007.
© 2010 Standard & Poor's Financial Communications. All rights reserved.