Tax Advantages of
Long-Term Care Insurance
Tax-Qualified and
Non-Tax Qualified Long-Term Care Insurance Policies
Before explaining the tax advantages of
long-term care insurance, it's important to understand the difference
between policies that have been granted guaranteed tax status and those
that have not
Prior to 1997, the lack of standardization
in LTC insurance policies made them difficult for consumers to
understand. This changed when legislation was passed that year to
produce standardized LTC Insurance policies that were also tax-qualified
.
Tax-Qualified (TQ)
Policies
The creation of TQ policies legitimized LTC
insurance. Our legislators sent clear messages that:
1. Our government cannot afford to finance
long-term care
2. LTC insurance will play a major role in
financing long-term care
The advantages of TQ policies include the
following:
• Written with easier to
understand language
• Contain standardized consumer
protections in every policy
• Offer a standardized set of
criteria for determining eligibility for benefits
• Clearly establish that the
benefits collected on TQ policies are guaranteed tax-free
• Under certain conditions,
premiums are tax deductible
Non-Tax-Qualified
(NTQ) Policies
It is possible to purchase LTC Insurance that is non-tax-qualified.
There has been an ongoing debate about the differences between NTQ and
TQ policies.
Some people mistakenly believe that NTQ
policies are less restrictive at the time of claim. But, NTQ policies
may contain nebulous language that allows an insurance company too much
discretion in determining eligibility for benefits.
Due to their lack of standardization and
tax qualifications, we recommend that you only consider
purchasing a TQ LTC insurance policy . In fact, most
reputable insurance companies offer only TQ
policies
If you purchased a long-term care insurance
policy prior to 1997, your policy was grandfathered into
tax-qualifed status. This will remain true as long as don't make any
material changes to your policy -an example would be applying to
increase the benefits of your existing policy.
CAUTION: Never replace or
request a modification to an LTC insurance policy you purchased in the
past without consulting an LTC Planning and Insurance expert.
Federal Tax
Advantages Take the Form of a Tax Deduction
Your filing status will determine the rules for your federal income tax
deduction.
Individuals (Non-self-employed)
Use form 1040 Schedule A
Long-term care insurance premiums may be
deducted as a medical expense, but only if you itemize on form 1040
Schedule A
Your total amount of medical expenses added
to the allowable amount of your LTC insurance premium (See
Maximum Allowable Premium Deducation chart below) must
exceed 7.5% of your adjusted gross income. The amount in excess of 7.5%
can then be deducted from your adjusted gross income.
Maximum
Allowable Premium Deduction
Self-Employed Individuals,
S-Corporations, and LLCs
These entities can deduct LTC insurance
premiums for policies purchased for owners and others, including
employees relatives.
The deduction is taken as a health
insurance premium expense, so the premium is deductible regardless of
whether or not you itemize deductions. However, the tax deductions are
still limited to the Maximum Allowable Premium Deduction
(See chart above) Premiums are subject to
self-employment tax.
C-Corporations
C-Corporations enjoy the most favorable tax
break.
C-Corporations can pay all or a portion of
LTC insurance premiums for employees. Employers who pay the premium for
their employees are allowed to choose which employees receive the
benefit: there is no requirement to purchase coverage for every
employee.
They are able to deduct the full amount of
the company's portion of the premium as a reasonable business expense.
If the employee pays part or all of the premium, the employee is
subject to the rules for "non-self-employed individuals" for their
portion of the premium paid.
No Section 125
"Cafeteria Plan" Status
Unfortunately, long-term care insurance DOES NOT
qualify as a benefit under Section 125, "Cafeteria Plan" status. The
result is that LTC insurance cannot be purchased with pre-tax dollars
under an employer-provided benefits plan.
This is a significant shortfall to offering
LTC insurance as an employee benefit and explains why more employers do
not offer coverage.
Using HSAs and MSAs
to Pay LTC Insurance Premiums
LTC insurance premiums CANNOT be paid with funds
in an IRA or 401K plan, but they CAN be paid
with funds in a Health Savings Account (HSA) or Medical Savings Account
(MSA).
State Tax Incentives
For Owning LTC Insurance
Many state governments are beginning to offer tax incentives to owners
of LTC insurance. And unlike the federal government, some states DO
offer a tax credit which will directly
reduce the amount of tax you owe.
Consult with your tax professional or LTC
Planning and Insurance expert for the current tax advantages offered in
your state.
Return
from Tax Advantages of Long-Term Care Insurance
to Long-Term Care Insurance Advice Home Page
|
