IRS Releases 2021 LTC Insurance Tax Guidance

The IRS just released its annual inflation adjustments for tax year 2021.  (Revenue Procedure 2020-45)

​This includes the amount of LTC insurance premiums which are considered deductible health insurance premiums (the "Eligible Premium") and the tax-free benefit amount for "cash benefit" indemnity plan payments - what the IRS calls "per diem" plans.

FOR CLAIMS IN 2021 with a "cash benefit" or indemnity (per diem) policy the minimum tax-free benefit increases to $400 per day ($12,167/month).
(This is a $20/day increase from 2020 which was $380/day.)
​

• LTC insurance benefits received on an indemnity (per diem) basis are tax-free to the GREATER OF $400/day (2021) OR your actual expenses paid for care if greater.
  • For example, a LTCI cash benefit payment of $9,000 per month ($300/day) is tax free no matter what was spent on care, even if less, since $300/day is less than the IRS per diem limit.
  • If the per diem benefit received is $430 per day, then $30 per day (2021) would have to be claimed as taxable income.
  • If the per diem benefit received is $430 per day, but you have $430 or more per day in paid caregiving charges, then it would all be tax-free.​

FOR PREMIUMS PAID IN 2021 the amount of tax-qualified premiums paid based on your age at the end of the tax year (on 12/31/2021) are considered a deductible medical expense up to the following age-based, "Eligible Premium" limits:

Age at end of 2021	Maximum Deductible Premium
40 or younger	$450
41 to 50	$850
51 to 60	$1,690
61 to 70	$4,520
71 or older	$5,640

NOTE that most taxpayers will not be able to realize any deduction as you must first be able to itemize deductions on Schedule A, have total un-reimbursed medical expenses including the LTC Eligible Premium that exceed 10% of your Adjusted Gross Income (AGI), and only the amount above the 10% threshold is deductible.

HOWEVER, if you have funds in a Health Savings Account (HSA) - or an employer-funded Health Reimbursement Account (HRA) - you CAN use those tax-free dollars to pay tax-qualified LTC insurance premiums up to the age-based, Eligible Premium amount shown above for yourself and a spouse.

BUSINESS OWNERS (and spouses) get to take the age-based, Eligible Premium deduction "above-the-line" on Form 1040, as part of the "Self Employed Health Insurance Deduction" (Form 1040, Schedule 1, Line 16).  This applies to owners of business incorporated or taxes as: Sole Proprietorships, Partnerships, or S-Corporations.  (Shareholder/Employees of a "regular" C-Corporation can have the entire premium deducted - without limit - if paid as an employee benefit by the corporation.)

CLICK HERE TO LEARN MORE ABOUT BUSINESS DEDUCTIONS FOR LTCI AND TO SEE THE 2020 LTC TAX GUIDELIENS COMPARED TO 2021.

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​* The tax information presented here is for general information only and should not be used nor relied upon as specific tax advice.  Taxpayers should consult with their CPA or qualified tax professional for advice regarding their own tax situation and the tax status of LTC premiums and benefits.