Tax Benefits of Long Term Care Insurance

Tax Benefits of Long Term Care InsuranceThere are many significant advantages to purchasing Long Term Care Insurance. For example, Long Term Care Insurance:

  • Helps provide protection for a retirement nest egg.
  • Helps people remain in their homes as long as possible.
  • Helps people ensure they receive the quality of care desired.
  • Helps ensure parents will not have to rely on their kids to take care of them.

While most would agree these are all great reasons to buy Long Term Care Insurance.  Let’s not forget there are also other important advantages to consider:

  • The potential to save on federal and state income taxes.

Long Term Care Insurance Premiums May be Tax Deductible

When it comes to the amount of tax savings, it all comes down to who you are.

Individual policyholders may be able to deduct a portion of the premium paid for a tax-qualified Long Term Care Insurance policy based on the eligible premium limits set annually by the federal government ( *see chart below).

Business owners who use business dollars to purchase Long Term Care Insurance can experience significant tax savings based on the tax structure of the business:

  • Self-employed business owners (sole proprietor, partnership, S Corporation, LLC) may deduct eligible premium paid for the owner, spouse and dependents and actual premium paid for employees.
  • Owner/employees of C Corporations may deduct eligible premium for the owner/employee, spouse, dependents and employees.

Policy Benefits May be Tax-Free

Benefits received under a tax-qualified Long Term Care Insurance policy are intended to be tax-free as long as they do not exceed the greater of actual qualified long-term care daily expenses or the IRS’s per day limitation, which is $290 in 2010 and $300 in 2011.

Out-of-Pocket Long Term Care Expenses May be Tax Deductible

Generally, any Long Term Care expenses the policyholder pays out-of-pocket may be claimed as a medical deduction on a federal income tax return. The only exception is payment for home care provided by a family member who is not a licensed health-care professional.

Some States Offer Tax Deductions

Currently 29 states, plus the District of Columbia, offer tax deductions and/or credits for people who purchase qualified Long Term Care Insurance policies. And these state deductions and credits are in addition to those offered by the federal government.

* Federal Guidelines for Eligible Premium

Individuals may claim the eligible premium amount, which is established annually by the federal government, as a medical expense as long as combined medical expenses exceed 7.5 percent of adjusted gross income and deductions are itemized on the federal income tax return.

Age

In 2010

In 2011

40 or younger

$330

$340

41 to 50

$620

$640

51 to 60

$1,230

$1,270

61 to 70

$3,290

$3,390

71 and older

$4,110

$4,240