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Tax
Deductibility
of Long-Term Care Insurance Premiums
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These are some guidelines to the deductibility of
long-term care insurance premiums. You may want to consult your tax
advisor before you make any decisions about deducting your long-term care
insurance premiums.
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Individual
LTC insurance premiums are
considered a medical
expense. The amount of the premium treated as medical expense
is limited to the "Eligible Premium", per Internal
Revenue Code 213(d), based on the age of the insured individual, in
the following chart:
|
 |
Table
A
|
Age of insured before the close of
the year |
2008 Eligible Premium Deduction |
| Ages 40 or less |
$310 |
| Ages 41 to 50 |
$580 |
| Ages 51 to 60 |
$1,150 |
| Ages 61 to 70 |
$3,080 |
| Ages over 70 |
$3,850 |
For people who itemize tax
deductions, medical expenses are deductible to the extent they
exceed 7.5% of adjusted gross income (AGI).
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Example:
A 59 year-old individual owns a long-term care
policy with an annual premium of $2,400. The deductible
component is the amount of eligible premium ($1,150). Medical
expenses of $5,940 (includes the $1,150 of eligible LTC insurance
premium). Adjusted gross income is $55,000.
Eligible Premium Deduction (EPD) $1,150 (Table A)
Medical Expenses = $5,940 (Including Eligible LTC
premium)
7.5% of AGI = $4,125 ( $55,000 x 7.5%)
Allowable Deduction for Medical Expenses = $1,815
($5,940-$4,125) Total Deduction = $1,815
In this example,
$1,290 of the LTC insurance
premium that exceeds the "eligible premium" as determined
in Table A is not deductible as a medical expense.
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If an individual purchases qualified
long-term care insurance on behalf of a parent who is not a
dependent, he or she is not entitled to a medical expense deduction.
A dependent is generally someone for whom at least
50 % of the support is provided by a taxpayer.
Self-employed
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A self-employed individual in
2008 can
deduct 100% of his/her out-of-pocket health insurance premiums (not
100% of the out-of-pocket medical expenses) in arriving at
their Adjusted Gross Income (AGI). [IRC 162(l)]. The full 100% is
available whether of not the individual itemizes deductions.
In the case of a tax-qualified LTC insurance policy, the 100%
self-employed deduction is limited to the "eligible
premium" (Table A). The deduction amount includes
eligible premiums paid for spouses and dependents. [IRC
162(l)]
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Table B
| Year |
Deductible Percentage |
| 2004 and
after |
100% |
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Example:
The percentage of medical expenses that is
deductible, for tax-qualified long-term care insurance, by
self-employed persons, without regard to the 7.5% floor is as
follows:
A self-employed 62-year-old owns a Tax-Qualified
long-term care insurance policy with an annual premium of $2,750.
The age based eligible premium is $3,080. As a self-employed
person, he can deduct 100% of the eligible premium, of $3,080.
Self-employed Deduction
$3,080 x 100% =
$3,080 ( Eligible Premium x
Eligible Deductible %) |
The portion of premium of the LTC
insurance premium that exceeds the eligible amount, is not
deductible as as medical expense.
Partnerships
S-Corporation/
Limited
Liability Company
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Partners in partnership and members of a Limited
Liability Company that is taxed as a partnership are
self-employed. The partnership or LLC pays the premium.
The partner or member includes the premium in their income, but may
deduct 100% of the eligible premium. [IRC 162(1): Rev. Rul. 91-26]
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Example:
Partner A - 50% partner
A 59-year old owns a Tax-qualified long-term care
insurance policy with an annual premium of $1,800
Self-employed Deduction (Step 1)
$1,150 x 100% =
$1,150 [Eligible LTC Premium (Table A)
x 100%]
Adjusted Gross Income (AGI)
$55,000 -
$1,150 = $ 53,890
All long-term care insurance benefits paid to the
policyholder will be income tax free. |
Subchapter C
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When a Business purchases a Tax-Qualified Long-Term
Care insurance policy on any of its employees, the employee's spouse
or dependents, as a part of an accident and health employee benefit
plan, the corporation is entitled to the full deduction as a
business expense on the entire premiums paid. [IRC(a)]. The
deduction is not limited to the "eligible premium"
component. The entire amount paid by the Business is excluded
from the employee's gross income, even if the premium exceeds
eligible premium [IRC 106, 7702b, 104(a)(3)]. This exclusion
applies to shareholder/ employees in a subchapter C Corporation and
to shareholders in an Subchapter S Corporation who owns 2% or less
of the corporation.
The purchase of a tax-qualified long-term care insurance policy
is not subject to any nondiscrimination rules, thus allowing an
employer to be selective in the classification of employees it
elects to cover ( i.e., a select group of officers/individuals). |
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Example
A Subchapter C Corporation purchases a
Tax-qualified Lon-term care insurance policy on one of its employees
who is 52 years old.
Premium Paid by C Corporation: $2,250
C-Corporation tax deduction: $2,250
Excluded from taxable income of the
employee: $2,250
Benefits paid out under a employer-purchased
qualified LTC insurance policy will be excluded from the employee's
gross income and therefore non-taxable. |
Cafeteria Plans & Medical Spending Accounts
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Qualified Long-Term Care insurance cannot be
purchased with pre-tax dollars under an employee-provided cafeteria
plan. Also, tax-qualified premiums cannot be reimbursed
under a flexible spending account. HSA's as a part of the 2003
Medicare Bill allow premiums to be pre-tax in 2005 and any year
thereafter
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State
Tax Incentives
| Some States have adopted tax
incentives to give residents either a tax-deduction or tax credits for
purchasing long-term care insurance. Here is a list of State
Tax Incentives |
Remember:
Consult your tax advisor
before deducting any insurance premiums. Here is a copy of the 2007
Publication 535 Business Expenses that explains deductibility of
long-term care premiums.
Top
Senior
Care Concepts, 2008 |
