IRS Long Term Care Deduction
Long Term Care Tax Deductions
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.
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