Tax Advantages Available for Long Term Care Insurance
Yes, it is not too early to be talking about taxes. Year-end actions can save you money and benefit you in the long run. One of the things some people forget about is Long Term Care Insurance. Yes, many people are looking into LTC insurance as a way to safeguard their 401k, IRA and other savings from the high costs and burdens of extended care. But did you know many people can have a tax advantage for doing so?
Tax-qualified LTC insurance premiums are considered medical expenses. For an individual who itemizes income tax deductions, medical expenses are deductible to the extent that they exceed 10% of the individual’s Adjusted Gross Income (AGI). (For individuals age 65 or older, the threshold remains at 7.5% for tax years 2013-2016). The amount of the LTC insurance premium treated as a medical expense is limited to the eligible LTC insurance premiums, as defined by Internal Revenue Code1 section 213(d)(10), based on the age of the insured individual. The portion of the LTC insurance premium that exceeds the eligible LTC insurance premiums is not includable as a medical expense.
The IRS publishes a chart which lists the amount you may deduct for each tax year.
A self-employed individual can deduct 100% of his/her out-of-pocket LTC insurance premiums, up to the age-based Eligible Premium amounts listed in Table 1. [IRC 162(l)(2)(c)] The portion of LTC insurance premiums that exceeds the Eligible Premium amount is not deductible as a medical expense. The deductible amount includes eligible premiums paid for spouses and dependents [IRC 162(l)]. It is not necessary to meet a 10% AGI threshold in order to take a deduction.
However, a self-employed individual may not deduct LTC insurance premiums during any calendar month in which he/she or his/her spouse is eligible to participate in a subsidized LTC insurance plan. A subsidized LTC insurance plan entails an employer paying part or all of the premiums for LTC insurance.
Partners of a partnership, members of an LLC that is taxed as a partnership, and shareholders/employees of Subchapter S Corporations who own more than 2% of the Corporation2 are taxed as self-employed individuals. The partnership, LLC, or Subchapter S Corporation pays the premium.
The partner, member, or shareholder/employee must include the LTC insurance premium paid on his/her benefit in his/her Adjusted Gross Income, but may deduct up to 100% of the age-based Eligible Premium amount. It is not necessary to meet a 10% AGI threshold in order to take this deduction.
When a C Corporation purchases a tax-qualified LTC insurance policy on behalf of any of its employees, and their spouses or dependents, the corporation is entitled to take a 100% deduction as a business expense on the total premiums paid.4 The deduction is not limited to the age-based Eligible Premium amounts. The purchase of a tax-qualified LTC insurance policy is generally not subject to any IRC nondiscrimination rules. Therefore, an employer can be selective in the classification of employees it elects to cover (e.g., a select group of officers). However, due to the enactment of the Patient Protection and Affordable Care Act (PPACA), certain policies may be subject to the nondiscrimination rules under the IRC 105(h).
You should consult with your tax and/or benefits advisors to ensure compliance with any applicable nondiscrimination rules.
The entire LTC insurance premium amount paid by the corporation is excluded from the employee’s Adjusted Gross Income, even if the premium exceeds the Eligible Premium amount. This exclusion applies to shareholders/employees (as long as they are treated as employees) in a Subchapter C Corporation and to shareholders/employees who own 2% or less of a Subchapter S Corporation.
Health Savings Account (HSA)
Tax-qualified LTC insurance premiums can be reimbursed through an HSA, tax-free, up to the Eligible Premium amounts even if the HSA is offered through an employer provided cafeteria plan.
Health Reimbursement Account (HRA)
Reimbursements for insurance covering medical care expenses, as defined in IRC Sec. 213(d), which includes qualified long-term care services and qualified LTC insurance premiums, are allowable under an HRA. Although employers pay for HRAs, an HRA cannot be provided by salary reduction or IRC Sec. 125 plans. As such, the LTC insurance premiums cannot be paid on a pretax basis through an HRA.
Tax-qualified LTC insurance policies cannot be purchased with pre-tax dollars under an employer-provided cafeteria plan. However, LTC insurance premiums may be paid through an HSA that is offered under an employer-provided cafeteria plan.
Flexible Spending Account (FSA)
Tax-qualified LTC insurance premiums cannot be reimbursed through an FSA.
This is the 2017 IRS tax deductible amounts:
Hint: If you are eligible to take a tax deduction for this year, pay the full premium with the application in 2016 even if the policy would go into effect in 2017.
You should safeguard your future retirement income and assets from the high cost of extended care … tax deductible or not. But if Uncle Sam helps … take advantage. Many states offer state incentives as well.
The financial costs and burdens of aging will impact your loved ones and impact your savings. Planning before retirement is smart and perhaps tax advantaged as well. If you are Generation X or a Boomer this should be on your radar screen.
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