Tax Breaks for Long-Term Care Insurance

As the American population ages and longevity increases, the need for long-term care will grow. As people get older, assistance may be necessary for daily activities or medical needs. However, if, in the future, a long-term care (LTC) insurance policyholder needs outside help, he or she will have the ability to choose how to receive care.

Health care costs continue to rise, and one financial tool that can help families pay for medical care for a lengthy period is long-term care insurance. It is often impractical for adult children who are in the middle of their careers or raising children to become full-time caregivers to their parents or other loved ones. Long-term care insurance can help pay for nursing home stays, assisted living, or in-home care. In addition, the government offers deductions to encourage the American public to buy long-term care policies. With the future of public assistance programs questionable, the government seems to be sending the message that the public must take control of its future care. With the offered deductions, you may realize that long-term care insurance is more affordable than you thought.

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) provided that long-term care insurance contracts should generally receive the same favorable income tax treatment (within prescribed limits) as accident and health insurance contracts. As life expectancies increase, planning for long-term care becomes more a matter of when rather than if. The incentives in HIPAA help to remove some of the uncertainty surrounding long-term care policies and enhance their attractiveness. Here are somekey points pertaining to long-term care policies:

  • Like premiums for regular health insurance, premiums for qualified long-term care policies can be deducted as a medical expense, subject to the general 10% of adjusted gross income (AGI) floor for medical expenses. However, the amount that qualifies for the medical expense deduction will be limited according to the age of the insured. The qualified deduction, to be indexed for inflation in future years, is subject to the following annual limits in 2017:


    Age Before Close of Tax Year

    Limitation

    40 or less..................................

    $410

    41 to 50....................................

    $770

    51 to 60....................................

    $1,530

    61 to 70....................................

    $4,090

    More than 70................................

    $5,110


    Source: Internal Revenue Service (IRS), 2017 

  • Long-term care expenses unreimbursed by insurance will be deductible as medical expenses (subject to the 10% of AGI floor). These expenses are not deductible if a relative provides the services, unless the relative is licensed to provide such services.
  • Long-term care coverage cannot be paid for through an employer-sponsored flexible spending arrangement (FSA). If an employer does provide long-term care coverage under a cafeteria plan, the premiums for such coverage will be included in the employee’s income.

This legislation sends a strong signal that government is not going to pay for long-term care but will provide tax incentives for individuals to assume responsibility for their own coverage.

 

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