INDIVIDUAL SITUATIONS:
Purchasing a tax-qualified “stand-alone” long-term care insurance policy may offer tax advantages. Long-term care insurance premiums are tax-deductible under current tax laws and treated as a medical expense. You may be able to deduct a portion of the premium you pay for a “tax-qualified” long-term care insurance policy. Each year, the federal government sets limits for eligible premiums – the amount that may be deducted. Premiums are tax-deductible to the extent that they, along with other unreimbursed medical expenses (including Medicare premiums), exceed (7.5 percent in 2022) of the insured’s adjusted gross income and you itemize deductions on your federal income tax return. 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.
Note, there is a limit on how large a premium can be deducted, depending on the age of the taxpayer at the end of the year. Above are the deductibility limits for 2021 and 2022. Any premium amounts for the year above these limits are not considered to be a medical expense.
AS YOU AGE…YOUR TAX DEDUCTIBLE LIMIT INCREASES:
Example: A husband and wife ages 59 and 49 purchase policies. The Eligible amount that the husband can include toward reaching the currently required threshold for deductible health (medical) expenses is $1,690 (2022 limits). The wife can apply $850 (2022 limits). Note: In two years, when they both are in new age categories, the higher deductibility amounts will apply. And, these amounts are increased annually by inflation.
Important Facts To Keep in Mind: Individuals must health qualify in order to obtain a “tax-qualified” long-term care insurance policy. Once you qualify, you will not lose your coverage even if (or better said when) your health changes. Government data shows that at older ages (after age 65) many people have medical expenses that they itemize on their tax returns. So while you may not be able to deduct LTC insurance premiums in early years or at a younger age, you may find they become deductible in later years when the tax deduction increases and provides an additional tax benefit to you.
BUSINESS SITUATIONS:
SELF-EMPLOYED: A self-employed individual can deduct 100% of his / her out-of-pocket (tax-qualified) long-term care insurance premiums, up to the eligible premium amounts listed above. The portion of the premiums that exceeds the eligible premium amount is not deductible as a medical expense. The deductible amount includes eligible premiums paid for spouses and dependents. It is not necessary to meet any thresholds in order to take this deduction.
Partnership, Limited Liability Company (LLC), Subchapter S Corporation: Partners in 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 (tax-qualified) long-term care premium in his / her adjusted gross income but may deduct up to 100% of the age-based eligible premium listed above. It is not necessary to meet any thresholds in order to take this deduction.
C Corporation: When a business purchases a (tax-qualified) long-term care insurance policy on behalf of any of its employees, their spouses or 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) long-term care insurance 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 10 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 the business. Note the use of ten-pay or accelerated premium payment scenarios with stand-alone long-term care insured solutions are harder to find in the marketplace today.
