Long Term Care Insurance Tax Deductions
Tax-Qualified Long Term Care Insurance
Tax Deductions on Long Term Care Insurance Premiums
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.
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.
- 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
The tax deduction is generally not available with so-called hybrid policies, such as life insurance and annuity policies with a long-term care benefit.
Tax-Free Benefits
The benefits paid by a tax-qualified long-term care insurance policy are intended to be tax free as long as they do not exceed the greater of:
- Qualified long-term care daily expenses, or
- The per-day limitation, which is $390 per day
Source: Section 7702B of the Internal Revenue Code (IRC)
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.
State Tax Deductions
Currently a number of states offer tax deductions and/or credits for people who purchase tax-qualified long-term care policies. These state deductions and credits are in addition to those offered by the federal government.
| Eligible Premium Guidelines for 2022 | |
| At age: | You can deduct: |
| 40 and younger | $450 |
| 41-50 | $850 |
| 51-60 | $1,690 |
| 61-70 | $4,510 |
| 71 and older | $5,640 |
Source: IRS Revenue Procedure 2020-45 (more info)
LTC Insurance Tax Deductions for Individuals and Businesses
| For Individuals |
Eligible premium may be claimed as a medical expense in 2020 as long as: • Combined medical expenses exceed 10 percent* of adjusted gross income, and *Percentage may be subject to change. |
|
For Self-Employed Business Owners Sole Proprietor | Partnership | LLC | |
Eligible premium may be 100% tax deductible when the business purchases long-term care insurance policies for: • Owner Actual premium may be tax deductible when the business purchases long-term care insurance policies for: • Employees |
| For Owners of C Corporations |
Actual premium may be 100% tax deductible when the business purchases long-term care insurance policies for: • Owner/Employee* *The officers and owners of C Corporations may be employees, which means 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: 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). |
We do not provide tax, legal or accounting advice. 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. We encourage you to consult your own tax, legal and accounting advisors.