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| Wednesday, February 22, 2012
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As already noted, the tax advantages listed in this section only apply to Tax-Qualified (TQ) policies.
Generally tax qualified LTC insurance is considered a form of medical/health insurance and the tax benefits follow health insurance rules. There are two exceptions: Individuals are limited in the amount of premium that is considered an Eligible medical expense, and voluntary premiums can not be paid on a pre-tax basis.
Individual
Premium payments to purchase qualified long-term care insurance by an individual - for yourself, your spouse, and your tax dependents (e.g. your children or dependent parents) are now includable as a personal medical expenses if you itemize your taxes [IRC Sec. 213(a)]. Medical expenses in excess of 7 ½% of your adjusted gross income are tax deductible. This means that a portion of your long-term care insurance premium can help you reach the 7 ½% and may even help you to exceed that threshold to receive a tax deduction.
NOTE that as a result of health care reform, the 7.5% threshold increases to 10% of AGI starting in 2013, making it even harder to qualify for an individual medical expense deduction.
If you have a Health Savings Account (HSA), you can pay your qualified LTC insurance premiums (or be reimbursed for premiums) tax-free from your HSA, but only up to the age-based, Eligible premium noted below. You do not have have to itemize and do not have to meet the 7.5% threshold.
Below is a table of the amount of premiums qualifying as medical expenses for the 2011 and 2012 tax years. This is called the "Eligible" long-term care premium. This increases each year based on the Medical Consumer Price Index.
| Attained age before the close of the taxable year |
Amount of premium that counts as an allowable medical expense |
| |
2011
|
2012 |
| 40 and younger |
$ 340 |
$ 350 |
| 41-50 |
$ 640 |
$ 660 |
| 51-60 |
$1,270 |
$1,310 |
| 61-70 |
$3,390 |
$3,500 |
| Older than 70 |
$4,240 |
$4,370 |
Self-Employed Business Owners
Qualified long-term care insurance premiums are treated like health insurance for the self-employed health insurance tax deduction. Self-employed individuals may deduct up to the eligible long-term care premium shown above [IRC Sec. 162(1)]. The definition of self-employed includes sole proprietors, partners, "greater than 2% shareholders"of S-corporations, or Limited Liability Corporation members taxed as "self-employed".
This is an "above-the-line" deduction taking on page one of Form 1040 as part of the "Self-Employed Health Insurance Deduction". Itemization and the 7.5% threshold are NOT required.
Example: Bob, age 61, owns his own consulting firm. His long-term care insurance premium is $2,000 per year. Based on the chart listed under the INDIVIDUAL section, in 2012 he is eligible to deduct up to $3,500. Therefore, he can deduct his entire $2,000 premium. (If Bob were 55, he could only take $1,310 as a Self Employed Health Insurance Deduction for LTC insurance.)
This deduction is also available for the business owner's spouse. Bob's wife would qualify for her own age-based deduction amount based on her age.
C-Corporations
Premium payments are fully (100%) deductible as a reasonable and necessary business expense- similar to traditional health and accident insurance premiums [IRC Sec. 213(d)1]. This can apply to shareholder/employees, their spouses and dependents, and all employees.
Employer-paid long-term care insurance is excludable from an employee's gross income - including a shareholder/employee's income [IRC Sec. 106(2)] and the benefits received are tax-free.
Non-Owner Employees
In any business entity, premiums paid by the business for a NON-owner are 100% deductible - without limit - as a reasonable and necessary business expense -- similar to traditional health and accident insurance premiums [IRC Sec. 162(2)].
Employer-paid long-term care insurance is excludable from the employee's gross income and the benefits received are tax-free [IRC Sec. 106(2)].
Voluntary Premiums
Premiums paid by an employee through payroll or any type of salary reduction agreement must be paid after-tax. LTC insurance is not allowed in a pre-tax, "125" plan [IRC Sec. 125(f)].
Jump to additional information in this topic by clicking on any of these links:
HIPPA | Federal | State.
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List of state tax incentives...
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Important Note: The information in this section is only intended as a general overview and is not intended to provide tax advice. There may have been changes in the tax law that may affect the information in this section. Please consult a tax-advisor for specific tax advice.
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