TAX DEDUCTIBILITY FOR LONG TERM CARE INSURANCE

AS YOU AGE … YOUR TAX DEDUCTIBLE LIMIT INCREASES

For Individual Purchase

Tax-qualified LTCi premiums are considered a medical expense. For an individual who itemizes tax deductions, medical expenses are deductible to the extent that they exceed 7.5% of the individual's Adjusted Gross Income (AGI). The amount of the LTCi premium treated as a medical expense is limited to the eligible LTCi premiums, as defined by Internal Revenue Code 213(d), based on the age of the insured individual. That portion of the LTCi premium that exceeds the eligible LTCi premium is not included as a medical expense.

Individual taxpayers can treat premiums paid for tax-qualified long-term care insurance for themselves, their spouse or any tax dependents (such as parents) as a personal medical expense.

The yearly maximum deductible amount for each individual depends on the insured's attained age at the close of the taxable year (see Table 1 for current limits). These deductible maximums are indexed and increase each year for inflation.

2008 Federal Tax Deductible Limits (Table 1)

Source: IRS Revenue Procedure: 2007-68

2009 Federal Tax Deductible Limits (Table 2)

Source: IRS Revenue Procedure: 2008-66

Example: A husband and wife ages 55 and 49 purchase policies. The Eligible amount that the husband can include toward reaching the 7.5% of the Adjusted Gross Income (AGI) threshold is $1,150. The wife (age 49) can apply $580. Note: In two years, when the wife will fall into the 51-to-61 threshold, the higher amounts for both will apply. And, these amounts are increased annually.

Planning Tip: Some LTC insurers offer "shared care" policies where two people share one pool of benefits. This may be used to maximize the eligible tax deductibility when there is a difference in ages between the spouses.

Tax Savings Tip: Long-term care insurance premiums may be paid from a Health Savings Account (HSA) up to the limits shown above.

Taxability of Benefits Received: Generally, benefits received from a tax-qualified LTCi policy that was purchased by an individual are non-taxable and therefore excluded from Adjusted Gross Income. Benefits paid under an indemnity policy are not taxed unless they exceed the higher of the cost of qualified long-term care or $270-per-day (the 2008 limit). The 2009 limit is $280-per-day.

Self-Employed

A self-employed individual can deduct 100% of his/her out-of-pocket long-term care insurance premiums, up to the Eligible Premium amounts listed above [IRC 162(l)]. The portion of LTCi premiums that exceeds the Eligible Premium (see Table 1) amount is not deductible as a medical expense. The deductible amount includes eligible premiums paid for spouses and dependents [IRC 162(l)]. It is not necessary to meet a 7.5% AGI threshold in order to take this deduction.

However, a self-employed individual may not deduct LTCi premiums during any calendar month in which he/she or his/her spouse is eligible to participate in a subsidized LTCi plan (where the employer pays all or part of the premiums for LTCi).

Partnership ² Limited Liability Company (LLC) ² Subchapter S Corporation

Partners is a partnership, members of an LLC that is taxed as a partnership, and shareholders/employees of Subchapter S Corporations who own more than 2% of the Corporation, are taxed as self-employed individuals. The partnership, LLC or Subchapter S Corporation pays the premium.

The partner, member or shareholder/employee includes the LTCi premium in his/her Adjusted Gross Income, but may deduct up to 100% of the age-based Eligible Premium, as listed in Table 1. It is not necessary to meet a 7.5% AGI threshold.

If the sole shareholder/employee purchases LTCi in his/her own name instead of that of the S Corporation, the S Corporation is not treated as a partnership and the shareholder is not treated as a partner. As such, the shareholder is not treated as self-employed and is only eligible to include his/her eligible LTCi premiums in his/her itemized deductions, which are subject to the 7.5% AGI threshold.

Planning Tip: In a sole proprietor or a partnership situation, the owner/partner who has
a spouse who is a true employee can deduct the actual (full) premium for that spouse's policy. If that spouse's policy had a shared benefit rider, that would be included in the deductible premium amount (actual total premium is deductible).

Subchapter C Corporation

When a business purchases a tax-qualified LTCi policy on behalf of any of its employees, or their spouses and dependents, the corporation is entitled to take a 100% deduction as a business expense on the total premium paid. The deduction is not limited to the aged-based Eligible Premiums.

The purchase of a tax-qualified LTCi policy is not subject to any non-discrimination rules, thus allowing an employer to be selective in the classification of employees it elects to cover.

Planning Tip: Premium payments generally will be tax deductible when the class is based on such factors as the officers of the corporation and length of service (e.g. company pays for all those who are Senior Vice President or higher and have been with the company for 12 or more years). Tax rulings have stipulated that the class cannot, however, be based on stock ownership.

Tax Savings Tip: The use of Ten-Pay or Accelerated Premium plans provide higher tax deductions for the Corporation and enable the long-term care insurance premium to be fully paid-up by the time the owner retires (no ongoing premiums) or sells.

Selling Tip: Fiscal Year-End Planning for profitable companies with a retained earnings issue. The fiscal (tax) year for C-Corps generally don't end on December 31st (as they do for 'pass through' entities and individuals). At the beginning of the fourth quarter of their Fiscal Year, profitable companies start looking for tax deductions. Recommend long-term care insurance as an executive benefit … benefits are far more valued than new office furniture.

The premium paid by the business is excluded (not reported) from the employee's Adjusted Gross Income even if the premium exceeds the Eligible Premium amount listed in Table 1.

Employer-Pay Contributory Arrangement on Behalf of an Employee

If an employer pays all or a portion of the tax-qualified LTCi premiums on behalf of an employee, the amount paid is deductible by the employer as a business expense. The deduction is not limited by the age-based limits. The entire employer contribution would also be excluded from the employee's AGI.

If the employer only pays a portion of the premium, the employee is able to apply the balance that he/she pays towards his/her medical expenses, up to the Eligible Premium amount, and would then be entitles to a deduction for medical expenses that exceed 7.5% of AGI.

Gift Tax Exclusion

In addition to the annual Gift Tax Exclusion of $12,000 per donee, a donor has the ability to pay for the medical expenses of the donee [IRC Sec. 2503(e)]. If those medical expenses are tax-qualified LTCi premiums, the exclusion is subject to the age-based limits for Eligible Premium listed in Table 1. An individual (donor) can purchase LTCi policies for family members (donees) and still maintain the annual Gift Tax Exclusion when selecting a Ten-Pay or Accelerated Payment Option.

Health Savings Account (HSA)

Tax-qualified LTCi premiums can be reimbursed through an HSA, tax-free up to the Eligible Premium amounts listed in Table 1, even if the HSA is offered through an employer-provided cafeteria plan.

Health Reimbursement Account (HRA)

Reimbursements for insurance covering medical care expenses, as defined in IRC Sec. 213(d), which includes qualified long-term care services and qualified long-term care insurance premiums are allowable under an HRA. Although employers pay for HRAs, an HRA cannot be provided by salary reduction or IRC Sec. 125 plans. As such, the LTCi premiums cannot be paid on a pre-tax basis through an HRA.

Cafeteria Plan

Tax-qualified LTCi premiums cannot be purchased with pre-tax dollars under an employer-provided cafeteria plan. However, LTCi premiums may be paid through an HSA that is offered under an employer-provided cafeteria plan.

Flexible Spending Account (FSA)

Tax-qualified LTCi premiums cannot be reimbursed under an FSA.

Acknowledgements: The American Association for Long-Term Care Insurance wishes to acknowledge John Hancock for permission to use text from their 2007 Federal and State Tax Guide as well as Dave DeBoer, JD, CLU, ChFC, CASL, Advanced Markets, Mutual of Omaha Insurance Company for reviewing this material. Neither these individuals nor companies warrant the information provided herewith. As mentioned previously, always seek the counsel of a professional tax advisor.

Click below for the one page chart for 2008.