Tax Tips: Long Term Care Insurance
You may be able to deduct all or part of the Long Term Care insurance premiums you pay for yourself, your spouse, or a dependent, but only if your policy meets the IRS criteria for a qualified policy. If you bought the policy before January 1, 1997, and it met the requirements of the state where it was issued, it is automatically considered a qualified policy. If you bought the policy later, it must satisfy several requirements to be considered qualified.
First of all, the policy must provide coverage only for qualified long term care services. These include necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, as well as maintenance or personal care services that are required by a chronically ill individual, in connection with a plan prescribed by a licensed health-care practitioner. Also, your policy must satisfy the following conditions:
• It must be guaranteed renewable, meaning that you can renew your policy as needed without undergoing additional medical exams
• It must not have a cash surrender value or any provision that allows you to cash in, pledge, assign, or borrow against the policy, or receive anything more than a refund of premiums paid if you cancel the policy
• It must provide that any refunds and dividends (other than refunds upon termination of the policy) can be used only to reduce future premiums or increase future benefits
• It must not pay for (or reimburse) expenses that are reimbursable under Medicare, unless Medicare is a secondary payer, or unless the policy pays a specified amount per day regardless of actual expenses
• It must meet certain consumer protection requirements set out in the Internal Revenue Code
If your Long Term Care policy meets the conditions listed above, or if it was issued before January 1st, 1997, at the least part of your premium may be tax deductible as a medical expense. To qualify for a medical expense deduction, your unreimbursed medical expenses (including Long Term Care premiums) must exceed 7.5% of your adjusted gross income. Also, you must itemize your deductions.
Note: Starting in 2013, the threshold to deduct medical expenses will be raised from 7.5% of adjusted gross income to 10% the threshold increase will be delayed until 2017 for those age 65 or older.
The maximum amount of Long Term Care insurance premiums that you can deduct in a year depends on your age at the end of the year. In 2012, deduction limits (which are indexed each year for inflation) are as follows:
Age Limit on Deduction
40 or younger $350
41 to 50 $660
51 to 60 $1,310
61 to 70 $3,500
71 or older $4,370
A qualified Long Term Care insurance contract is treated as an accident and health insurance contract, and the benefits are typically treated as tax free. However, if your contract pays a set dollar amount per day (per diem), the tax-free treatment is subject to a certain limit, indexed annually for inflation. Benefits over and above this limit are generally considered taxable income.
Under this limit, the amount of your Long Term Care insurance benefits that is excluded from taxation in a given period is figured by subtracting any reimbursement received (through insurance or otherwise) for the cost of qualified long-term care services during the period from the larger of the following amounts:
• The actual cost of qualified Long Term Care services during the period
• The dollar amount for the period ($310 per day for any period in 2012)
Abe Glickman, LTCA, LTCP
Member: AALTCI, NAHU, NAIFA, SOA
Abe Glickman Insurance Group
Toll-Free Phone: 877-298-5824
“It is better to create a plan 10 years too soon than one day too late.”
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