Long-Term Care Insurance Tax Deductions

Is Long-Term Care Insurance Tax Deductible?

Yes, current law allows tax deductions for long-term care insurance premiums. This allows for the deduction of either the actual premium or the eligible premium paid on a tax-qualified long-term care insurance policy.

As long as the long-term care insurance policy is “qualified”, these premiums (what the policyholder pays the insurance company to keep the policy in force) are deductible for the taxpayer, his or her spouse, and other dependents.

For Self-Employed

If you are self-employed, the tax-deductibility rules are a little different: You can take the amount of the premium as a deduction as long as you made a net profit; your medical expenses do not have to exceed a certain percentage of your income.

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Defining actual and eligible premium:

  • Actual premium is the actual amount of premium paid
  • Eligible premium is an amount determined annually by the federal government based on the medical care components of the Consumer Price Index and the age of the policyholder

State Tax Deductions

Currently a number of states offer long-term care insurance tax deductions and/or credits for people who purchase tax-qualified LTC policies. These state deductions and credits are in addition to those offered by the federal government.

 

Long-Term Care Insurance Tax Deductions
for Individuals and Businesses

Eligible LTC Premium for 2024
At age:You can deduct:
40 and younger$470
41-50$880
51-60$1,760
61-70$4,710
71 and older$5,880
For IndividualsEligible long-term care premium may be claimed as a medical expense in 2024 as long as:

• Combined medical expenses exceed 10 percent* of adjusted gross income, and
• Deductions are itemized on the federal income tax return

*Percentage may be subject to change.

For Self-Employed Business Owners

Sole Proprietor
Partnership
LLC
S Corporation

Eligible long-term care premium may be 100% tax deductible when the business purchases long-term care insurance policies for:

• Owner
• Spouse
• Dependents

Actual LTC premium may be tax deductible when the business purchases long-term care insurance policies for:

• Employees

For Owners of
C Corporations
Actual long-term care premium may be 100% tax deductible when the business purchases long-term care insurance policies for:

• Owner/Employee*
• Spouse
• Dependents
• Employees

*The officers and owners of C Corporations may be employees, which means LTC premium paid by the corporation for tax-qualified LTCi (QLTC) policies may be deductible by the corporation and not taxable to the employees if the contributions are made pursuant to an employee benefit plan.

If the QLTC employee benefit plan is insured, it need not conform to non- discrimination rules and may be available only to a select class of employees (IRC Section 106). The corporation must be able to show that the plan covers owner- employees as employees and not as owners. QLTC coverage may not use salary reduction dollars to pay its premium contribution.

Tax Savings Tip: Choose Ten-Pay or Accelerated long-term care premiums as they provide higher long-term care insurance tax deductions for the Corporation and enable the premiums to be fully paid-up by the time the owner retires (no ongoing premiums).

Taxation of LTCI Benefits

In general, benefits paid by a tax-qualified long-term care insurance policy are intended to be tax free, subject to the following guidelines:

Reimbursement benefits are not included in income.

Per diem (or indemnity) benefits are not included in income except amounts that exceed the greater of:

  • $410 per day for 2024, or
  • Total qualified LTC expenses.
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Return of premium (non-forfeiture) benefits:

  • Available only upon total surrender or death.
  • May not be borrowed or pledged.
  • Included in gross income to extent of any deduction or exclusion allowed with respect to premium.

Tax Deductible Out-of-Pocket Expenses

Generally, any long-term care expense paid out-of-pocket may be claimed as a medical deduction on a federal income tax return. The only exception is payment for home care provided by a family member who is not a licensed health-care professional.

Hybrid Long-Term Care Insurance Tax Deductions

LTC benefits paid from a Tax-Qualified (7702B) annuity or life insurance “linked benefit” plan are tax-free as noted above.

Cash surrenders from a LTCI linked-benefit plan that paid LTCI benefits may have a reduced cost-basis.
__________
Premium payments for annuity or life insurance benefits in linked-benefit LTCI plans are NOT deductible.
(Separate TQ LTCI continuation rider premiums may be deductible.)

 

Source: IRC §213(a), 213(f) IRS Revenue Procedure 2023-34 (more info)

This material is for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. ACACIA Insurance Services, Inc. and our affiliated licensed professionals, do not provide tax, legal or accounting advice. We encourage you to consult your own tax, legal and accounting advisors.

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