Did you know that a qualified long-term care insurance (LTCI) plan is tax deductible? The reason? The federal government and a growing number of states are beginning to offer tax incentives to encourage Americans to take responsibility for their future long-term care needs.
If you would like to take advantage of the tax credit available to those purchasing LTC insurance protection, now is the time to consider your options.
First, let’s take a look at the table below, which shows the allowable deduction for 2013. As you can see the deductions increase based on your age.
|Age of Insured before end of the year||2013 LTCI eligible premium|
|Age 40 0r Less||$360|
|Age 41 to 50||$680|
|Age 51 to 60||$1,360|
But, this table doesn’t tell the entire story. How much you deduct is also dependent on how you file your taxes. Let’s review some of these options.
For individuals, the Internal Revenue Service considers tax-qualified long-term care insurance premiums a medical expense. How much you save depends on your age and how you file your income taxes.
If you itemize your deductions, you can deduct your long-term care insurance premiums under medical expenses on Schedule A. However, because the long-term care insurance portion is capped by age and only the portion of your total medical expenses that exceeds 10% of your adjusted gross income is deductible, few individuals realize a full deduction on their long-term care insurance premium.
Since the long-term care insurance cap increases with age (at 40, the 2013 limit is $360; at 51 to 60, it’s $1,360 and at 61 it’s $3,640) the deduction becomes more significant with age.
The tax advantages of a long-term care insurance policy increase if you’re self-employed. The allowed premium, based on your age, is an above the line deduction, not subject to the AGI rule.
Plus, you don’t have to be self-employed full time to enjoy the deduction.
If you own a corporation, the premiums paid by the corporation can be deducted as a business expense. How the owner of the corporation handles premiums paid by the corporation for them will vary based on how the corporation is organized. Owners of C corporations do not need to report premiums paid by the corporation as income whereas this is not the case with LLC’s, Partnerships and Sub Chapter S corporations.
Health Savings Account (HSA)
HSA monies can be used to pay premiums for long-term care insurance, up to the allowed amount by age. Section 125 or cafeteria plan monies cannot be used to pay premiums for long-term care insurance.
State income tax credits
As I mentioned earlier, an increasing number of states offer some form of tax credit or state income tax deduction as an incentive to purchase long-term care insurance, with some ranging as high as 25 percent of the total long-term care insurance premiums paid during the taxable year.
Want to learn more? Take a look at this helpful guide and then give us a call to discuss what makes sense for you.