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Tax Implications Of LongTerm Care Insurance Premiums And Benefits

Written By: Nathan Justice
Reviewed By: William Rivers
Published: June 20, 2023
Last updated: December 7, 2023

Long-term care insurance provides crucial financial protection for individuals who require extended care services due to age, illness, or disability. While the primary focus is on the coverage and benefits of such insurance, it's important also to consider the tax implications associated with long-term care insurance premiums and benefits. Understanding the tax advantages and considerations can help individuals make informed decisions and maximize the benefits of their insurance policies.

In this article, we will explore the tax advantages of long-term care insurance, including premium deductibility and tax-free benefits. We will also discuss the tax filing procedures related to long-term care insurance, covering premium deductions and reporting benefits on income tax returns. By gaining a comprehensive understanding of the tax implications, individuals can effectively plan for their long-term care needs and optimize their financial strategies.

Tax Advantages Of Long-Term Care Insurance

Premium Deductibility

Long-term care insurance premiums can be tax-deductible under certain conditions. There are three main ways to obtain deductions for your long-term care insurance premiums: itemized deduction, self-employed deduction, and using a Health Savings Account (HSA).

Itemized Deduction

As part of your itemized deductions, you can deduct the amount you pay for long-term care insurance premiums, up to a specific limit based on your age. This deduction is available for individuals as well as couples filing a married joint tax return. However, only the portion of your total medical and dental expenses that exceed 7.5% of your adjusted gross income (AGI) may be deducted.

Self-Employed Deduction

If you're self-employed and not eligible for employer-sponsored health coverage, you can deduct 100% of your long-term care insurance premiums as an adjustment to income. This deduction is not limited by the age-based maximums for itemized deductions and does not require you to itemize your medical expenses. However, the premiums must be less than your earned income from the trade or business.

Health Savings Accounts

If you have a Health Savings Account (HSA), you can use your account to pay for your long-term care insurance premiums tax-free. The premiums must be paid directly from your HSA to your insurance company for them to be non-taxable withdrawals. The premium amount you can withdraw is limited to the age-based maximums allowable for itemized deductions.

Tax-Free Benefits

In addition to premium deductions, long-term care insurance benefits also come with tax advantages.

Payouts As Non-Taxable Income

Long-term care insurance benefits are generally considered non-taxable income, up to a certain limit. Benefits paid by a tax-qualified long-term care insurance policy are generally tax-free, as long as the total payments received in a year do not exceed a specified amount or the cost of qualified long-term care services.

Per Diem Exclusions

For policies that pay benefits based on a per diem or daily rate, a portion of the payments may be excluded from taxable income. This exclusion applies even if your actual long-term care expenses are less than the per diem payments. However, the exclusion amount is capped, and any excess payouts are subject to taxation.

Tax Credits And Discounts

You may also be eligible for tax credits and discounts based on your long-term care insurance.

Federal Tax Credits

Currently, there are no federal tax credits for long-term care insurance premiums. However, you may be able to claim a credit for the cost of premiums if you provide care for a loved one with long-term care needs.

State Tax Credits And Incentives

Some states offer tax credits, deductions, or other incentives for purchasing long-term care insurance. These incentives vary by state, so it's essential to research your local laws and consult with a tax professional to understand the specific benefits in your area.

Tax Filing Procedures For Long-Term Care Insurance

Long-term care insurance can provide financial assistance and peace of mind for those who need long-term care due to age, illness, or disability. During the tax season, there are important factors and procedures related to long-term care insurance that taxpayers should be aware of. This section will provide an overview of tax filing procedures for long-term care insurance, including claiming premium deductions, and reporting benefits on an income tax return.

Claiming Premium Deductions

Long-term care insurance premiums may qualify for tax deductions as medical expenses. Taxpayers who itemize deductions on their tax return can include premiums paid for a qualified long-term care insurance policy, subject to certain limits and conditions. The following subsections will outline age-based deduction limits, the medical expense threshold, and record-keeping requirements.

Age-Based Deduction Limits

The amount of long-term care insurance premiums that can be deducted is based on the age of the insured individual at the end of the tax year. The Internal Revenue Service (IRS) sets age-based limits for tax deductions related to long-term care insurance premiums. These limits are adjusted annually for inflation. For reference, the age-based deduction limits for 2021 are as follows:

  • Age 40 or younger: $450

  • Age 41 to 50: $850

  • Age 51 to 60: $1,690

  • Age 61 to 70: $4,520

  • Age 71 and older: $5,640

It is important to note that these limits are per person, so if spouses file a joint tax return and both have long-term care insurance policies, each spouse’s premium deduction is subject to their respective age-based limit.

Medical Expense Threshold

To claim the premium deductions for long-term care insurance, the total of your unreimbursed medical expenses, including the premiums, must exceed 7.5% of your adjusted gross income (AGI) for the tax year. Only the amount of medical expenses that exceed this threshold can be claimed as deductions. For example, if your AGI is $60,000 and your total eligible medical expenses are $5,000, you may claim deductions for $950, which is the excess amount beyond 7.5% of your AGI ($4,500).

Record-Keeping Requirements

In order to claim premium deductions for long-term care insurance, it is crucial to maintain proper records to substantiate your claims. These records should include documentation of premium payments, such as invoices or statements from the insurance provider and proof of your payments (like canceled checks, bank statements, or credit card receipts). You should also keep a copy of your long-term care insurance policy that verifies it as a qualified policy under IRS rules.

Reporting Benefits On Income Tax Return

Long-term care insurance benefits received may or may not be taxable, depending on the type of benefits and exclusion limits. This section will discuss exclusion limits, coordination with other health benefits, and reporting requirements when filing your income tax return.

Exclusion Limits

Long-term care insurance contracts are generally classified as either reimbursement policies or per diem (daily benefit) policies. Reimbursement policies provide benefits for actual long-term care expenses, and in most cases, these benefits are not considered taxable income. However, per diem policies pay a set daily amount, regardless of actual expenses, and may be subject to taxation if they exceed a certain limit. For 2021, the IRS allows an exclusion of up to $400 per day for long-term care insurance per diem benefits. Any amount received in excess of the daily exclusion limit is generally considered taxable income.

Coordination With Other Health Benefits

If you are receiving other tax-free health benefits, such as Medicare or employer-provided health coverage, you must reduce the long-term care exclusion limit by the amounts of these tax-free benefits. This means that your long-term care insurance benefits may become partially taxable if you are also receiving other tax-free health benefits.

Reporting Requirements

If your long-term care insurance benefits are taxable, you will need to report them on your income tax return. The insurance company will provide you with a Form 1099-LTC, which details the total benefits paid to you or on your behalf during the tax year. You will report the taxable benefits as "Other Income" on your tax return (e.g., Line 8z on Form 1040 for 2021).

In summary, understanding tax filing procedures for long-term care insurance is essential to accurately claim premium deductions and report benefits on your income tax return. Ensure you are aware of age-based limits, medical expense thresholds, and record-keeping requirements for deductions, as well as exclusion limits and reporting requirements for benefits.

Read this blog to assess the need for long-term care insurance for those in your life who have dementia.

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Nathan Justice manages community outreach programs and forums that help many senior citizens. He completed a counseling program at the University of Maryland’s Department of Psychology.
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