One of the more frequently asked questions about long term care insurance is if you can’t afford the long term premiums are there any tax benefits to owning a long-term care policy that might help subsidize the premiums.

Here are some answers to those questions given by tax experts:

1. Long-term care premiums are deductible as a medical expense (subject to the 7.5 percent-of-AGI floor), although there are limits to the deduction based on the taxpayer’s age. For example, a taxpayer between ages 61 and 70 may deduct as much as $3,080 in 2008 ($3,180 in 2009). A couple filing a joint return can deduct as much as $6,160 in 2008, if each spouse pays premiums on qualified long-term care policies. Payments in excess of any LTC benefits may be deducted as medical expenses.

On October 20, 2011, the Internal Revenue Service (IRS) issued Revenue Procedure 2011-52, which included inflation adjustments for the tax deductibility limits of long term care insurance for 2012. This is one of the ways the way the government is trying to encourage people to get long term care policies. There may also be state programs which offer tax deductions or credits for the purchase of long term care insurance.

Here is the table with the age divisions and deductions:

2012 Federal Long Term Care Insurance Tax Deductible Limits

Taxpayers Age at End of Tax Year 2012 2011

40 or Less $350 $340

More than 40 but not more than 50 $660 $640

More than 50 but not more than 60 $1,310 $1,270

More than 60 but not more than 70 $3,500 $3,390

More than 70 $4,370 $4,240

Source: IRS Revenue Procedure 2011-52 and IRS Revenue Procedure 2010-40

If you are self-employed you get an even better deal on your deductions. You are eligible to deduct 100% of long term care insurance premiums (subject to the maximum deductibility limits) without having to meet the 7.5% adjusted gross income medical expense requirement. This includes premiums paid for a spouse or dependents. The amount exceeding the deductibility limits will be taxed as ordinary income.

What if an employer pays for a portion or all of an employee’s tax-qualified long term care insurance premiums? If you are employed and your employer pays premiums on your behalf these are tax deductions for your employers business expense. The deduction for these premiums is not subject to age-based maximum deductibility limitations. You do not have to include these in your adjusted gross income.

If you are employed and your employer only pays a part of the premium you can deduct the remaining premium subject to the age-based deductibility limits set forth in IRS Revenue Procedure 2011-52, provided they are able to satisfy the 7.5% adjusted gross income medical expense requirement.

2. Using a distribution from an HSA to pay for the premiums is a qualified tax free HSA distribution, you do not get an additional itemized deduction because the HSA contribution itself was deductible and the distribution is tax free for qualified medical expenses. So here you get a double tax free supplement which will help reduce your cost. For more information see our postAre Long Term Care Premiums HSA Contribution

3. The new annuity 1035 exchange effective in 2010 allows you to do a partial 1035 from your NQ annuity to pay for a qualified LTC contract. The annuity distribution is tax free, but you do not get an itemized deduction for the LTC purchase. Tax experts say you would probably have to do one of these exchanges each year to pay the current LTC premium.

A health savings account (HSA) is a tax-favored savings account created for the purpose of paying medical expenses. Contributions to the HSA are 100% deductible (up to the legal limit) — just like an IRA. If you use the money to pay for qualified medical expenses you do not have to pay taxes.

Any interest you earn on the money is also tax free provided you use it to pay for qualified medical expenses.

HSA money is different than the flexible spending account you do not have to forfeit the money at the end of the year. In other words if you don’t use it – you get to keep it and it continues to grow, tax-deferred.

No penalty or taxes will apply if the money is withdrawn to pay premiums for qualified long-term care insurance.

Many people were concerned that health care reform would affect their HSA account if they were using it to pay for long term care insurance premiums. The latest information on health care reform says there is not an impact on long term care premiums. There is an increased penalty on HSA distributions that are not used for qualified medical expenses for those under the age of 65 from 10 to 20 percent but long term care premiums are not unqualified medical expenses.

The Patient Protection and Affordable Care Act (PPACA) has created long-term care insurance programs to be financed by voluntary payroll deductions as a way to provide benefits to adults who become disabled.

You should be able to participate in this insurance program without losing your HSA eligibility. You may also be able to pay for the premiums from your HSA.

Here is the wording directly from the IRS web site regarding long term care insurance premiums and HSA’s
http://www.irs.gov/publications/p969/ar02.html#en_US_2010_publink1000204083

Insurance premiums. You cannot treat insurance premiums as qualified medical expenses unless the premiums are for:

You cannot claim this credit for premiums that you pay with a tax-free distribution from your HSA. See Publication 502 for more information on this credit.

As way to help pay for those long term care policies HSA’s a great way to help cut the cost. No taxes on the money you set aside and no taxes on the interest you accrue.

Our paper had a really good article on the expanded child tax credit 2011. So here is a quick summary:

Who is a dependent and how much can you deduct:

For each dependent child, you can take a $3,650 personal exemption. The more children, the more exemptions you can take. Each personal exemption serves to reduce your income.

Children under age 19 can be claimed as dependents; those under 24 if they are full-time students. Children 24 or older who are full-time students can be claimed provided their income is less than $,3650. Age limits do not apply to disabled children.

If parents are divorced only one may claim the child as a dependent. Child support is not taxable as income although alimony is.

Expanded Child Tax Credit 2011

For parents to quality for the credit of up to $1,000 their child must be under 17, must be claimed as a dependent on the parents’ tax return, and must have lived at home more than half the year. Only U.S. citizens , nationals or legal residents are eligible. This credit phases out as income increases.

If the credit exceeds the income tax owed, taxpayers may be eligible for the Additional Child Tax Credit which is refundable. That means you may be able to get the money even if you don’t owe taxes.

Adoption

The maximum credit if you adopt a child is $13,170 for each child. The IRS says the credit is based on the reasonable and necessary expenses related to a legal adoptions, including adoption fees, court cost, attorney’s fees and travel expenses. Eligibility for the credit begins phasing out for taxpayers whose adjusted gross income exceeds $182,520.

The adoption credit is refundable, so if you qualify you will get money even if you have no tax liability. You must fill out a special form (Form 8839). You must also provide documentation showing the adoption was completed so you can not file your return electronically.

Earned Income Credit

The maximum income a family can have and still qualitfy is now $48,362. Actual credit amounts vary, depending on income, family size and other factors.

Tax Deductions for Children in College

The American Opportunity Credit is a maximum of $2,500 of the cost for tuition and other higher education expenses. The credit can be used for the first four years of college, compared to the first two years for the Hope credit. Students must be enrolled at least half-time. If you have mulitiple students attending college, you get to the claim a separate credit for each of them. The credit which is partially refundable phases out at higher incomes.

Tuition deduction – For those that don’t qualify for the American Opportunity Credit, another option might be the tuition and fees deduction of up to $4,000. The deduction doesn’t require someone to attend school at least half-time. You cannot use both the American Opportunity Credit and the tuition deduction together. The IRS says though the credit will usually result in greater tax saving taxpayers should calculate it both ways and see which is better.

The tuition deduction was included in the tax law passed in Congress last month so the IRS has not had a chance to update their systems. If you claim the tuition deduction you will have to wait until mid February to file.

If you are considering paying one of those tax preparation agency to help you prepare the EZ tax return think again. The typical cost for preparing your EZ tax return is $39.00. There is also an additional fee applied with the earned income tax credit. That cost is usually $35.00.

The tax preparation companies say that for your money you are getting the expertise of the company. If they make a mistake they would pay any additional interest or penalties. If you were to be audited they explain the notice and tell you what you need to do to comply with IRS audit process.

But a recent column in the business section of our local paper pointed out that the IRS will do all this for you – for free. The size of a taxpayer’s household and paycheck determine eligibility for the Earned Income Tax Credit. To qualify for the credit the taxpayer’s earned income and adjusted gross income must be less than:

Earned Income Tax Credit Qualifications

- $13,400 single with not children or $18,400 if married

The maximum credit amounts for the categories range from $457 for taxpayers without children to $5,657 for those with three or more.

Taxpayers are eligible to use the 1040-EZ if they:

- Have taxable income of less than $100,000
- Have no dependents
- Have a filing status of single or married filing jointly
- Have no mortgage payment
-Claim the standard deduction and do not itemize

If you meet the conditions listed above you can use the EZ tax return. The form is only two pages and you can use the IRS’ free electronic version of the tax form that does the math for you. Go to www.irs.gov/freefile

If you also qualify for the Earned Income Tax Credit, use the worksheet attached to the form’s instruction booklet to figure out what the credit will be for you. If you are still having problems there may be free help available. In our area if you make less than $50,000 you can get your tax return done for free by IRS-certified tax preparers. Check out the possibility if you qualify.

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Here are some suggestions from AARP of what you need to provide, if you are going to get help with your taxes. I’m sure the list is applicable to those besides seniors. Here is what you should bring:

Valid picture ID

Routing and bank account numbers for direct deposit of refund

If you need more time for tax preparation you can file an extension. You can request an extension with form 4868, available at www.irs.gov. If you file an extension, you have until Oct. 15 to send in your paperwork. The extension to file is not an extension to pay any taxes you owe.

Check www.aarp.org/money/taxaide for more information

See our related postTips on Avoiding an Income Tax Audit

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