Long Term Care Insurance Tax Deductibility
Long Term Care Tax deductibility
by Marsha McDonald
It's the time of year when Americans turn their attention to taxes. A quick scan of personal finance magazine covers and tax prep ads on television make this clear: most people
hate doing their taxes almost as much as they hate paying their taxes. However, there's one word that can make it all bearable: deductions.
First, the bad news. Many long-term care insurance
policyholders may find it difficult to deduct their premiums from their taxable income for federal income tax purposes.
The good news is, even if you cannot take a deduction for
federal tax purposes, many states and the District of Columbia have tax deductions or tax credits for long-term care (LTC) insurance. States offer these incentives largely
because they share the burden of paying for Medicaid's long-term care benefit with the federal government. Legislators and governors know that LTC insurance owners save the state money, either by avoiding Medicaid
altogether or by delaying their enrollment.
Let's take a look at how federal deductibility works. When the Health Insurance Portability and
Accountability Act (HIPAA) became law, it defined what is referred to as a qualified long-term care insurance policy, and made the premiums eligible as a deduction. Qualified premiums are those that
do not exceed the age-based limits shown below, and are based on the taxpayer's age as of Dec. 31 of the tax year.
Qualified long term care insurance premiums for an individual taxpayer, his or her spouse and eligible dependents are deductible medical expenses (assuming the taxpayer files an itemized return), but
only to the extend that those premiums, when added to all other unreimbursed medical expenses, exceed 7.5 percent if the taxpayer's adjusted gross income.
Maximum long-term care premium limits for taxpayers
2007/2008
Age 40 or less: $290/$310
Age more than 40 but not more than 50: $550/$580
Age more than 50 but not more than 60: $1,110/$1,150
Age more than 60 but not more than 70: $2,950/$3,080
Age more than 70: $3,680/$3,850
Businesses may also be able to deduct LTC insurance premiums they pay for their employees,
including spouses and legal dependents, similar to the way that they deduct health insurance premiums. The aged-based limits discussed above do not apply. These premiums are generally not
treated as taxable income to the employee. Owner/employees of C-corporations are usually treated as "employees" for these purposes, and so premiums are deductible to the corporation and not
included in the insured's income. Owners of businesses that pass income and losses directly through to the individual owners, such as with S corporations and partnerships, may be able to fully deduct
qualified premiums (subject to the age-based limits) paid for themselves, their spouses and legal dependents on their individual tax returns.
As with any federal or state tax-related question, be sure to consult a qualified tax professional who is familiar with your situation for a definitive answer.
Marsha McDonald is an insurance agent who specializes in long-term care insurance, and represents several leading long-term care companies. Marsha is authorized to offer AARP endorsed products.
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