Benefits of Long-Term Care Insurance for Taxes

Under federal law, those who purchase long-term care insurance (LTCI) may be eligible for advantageous tax treatment. If they meet specific age-based thresholds, they can deduct the premiums from their income taxes. While many people do not itemize their deductions, they may be able to save taxes down the road with tax-qualified long-term care coverage. These are six tax benefits of LTCi that you should be aware of.

1. Benefits That Are Tax-Free

Income taxes do not apply to benefits obtained from a long-term care insurance policy that qualifies for tax exemption. These benefits come in the form of either a per-diem payment cap that is adjusted for inflation or reimbursement for eligible costs. A part of the premiums for long-term care insurance may be tax deductible for self-employed individuals on Form 1040, Schedule A, Line 29, as an itemized medical deduction. This is true for both individual and hybrid policies—that is, life insurance with an LTC benefit—of life insurance. Even more important are the tax benefits of an employer-paid long-term care policy. Benefits are received tax-free and premiums are not deducted from a shareholder's or employee's gross income under a C-Corp since they are entirely a company expense. But in order to be eligible for this benefit, the premiums have to be fair and essential business costs.

2. Protection Against Inflation

A cost-of-living option is provided by several insurers, which automatically raises the daily maximum, maximum lifetime benefit, and other benefit amounts by 5% every year in order to keep up with inflation. There are usually other options available with this option, including selecting the simple or compound growth rate. Joshua Rodriguez is a writer on investing and personal finance who explains difficult subjects to readers, such as long-term care insurance. When looking for a plan, he advises consulting with an expert. Certain hybrid life and long-term care insurance policies—like OneAmerica's Indexed Universal Life policy or Lincoln Financial's MoneyGuard Market Advantage—increase the LTC payout in response to investment performance. In order to reduce rates, they may also enable you to front-load the policy with more coverage. When weighing your options, compare them and take your age into account.

3. Policies Qualified by Taxes

You could be eligible to deduct long-term care insurance premiums from your taxes, depending on how your company is set up. The acquisition of LTCi is encouraged by this benefit. Like health insurance premiums, premiums for people and corporations are deductible and have no upper limit. Furthermore, your policy's benefits will be tax-free, provided they comply with specific federal requirements. If your contract complies with these requirements, an LTCI specialist can let you know. This is a crucial factor to take into account for anyone considering acquiring LTCI coverage. It enables "apples to apples" comparisons between different policies. This is particularly useful for comparing various businesses. It might even enable you to choose the best kind of coverage for you in a better educated manner.

4. Premiums That Are Deductible

The premiums for your long-term care insurance coverage may be tax-deductible if certain conditions are met. This is particularly true for LTCI, which an employer buys for its staff. Under federal tax laws, these plans are regarded as regular and necessary business costs. Additionally, the policy's final benefits are not subject to taxes. As long as the cost of the LTCi does not surpass 7.5% of the taxpayer's adjusted gross income and they itemize on Form 1040, they can write off the premiums as a separate medical expense on their taxes. The table below illustrates how the deductible amount changes based on age. If self-employed people use their Health Savings Account funds to purchase qualified long-term care insurance policies up to the IRS yearly limits, they can further reduce their tax burden.

5. Per Diem Tax-Free

Since many long-term care insurance policies provide tax benefits, choosing one can be a wise financial move. The details, though, can be difficult to understand. Therefore, it's crucial to speak with a knowledgeable tax expert about your unique situation and make plans accordingly. If LTCI benefits are deemed reimbursement, they are typically tax-free up to a daily maximum that is inflation-indexed. Furthermore, premiums paid for individual qualifying coverage are tax deductible (on Schedule A) as medical costs up to a maximum of 7.5% of adjusted gross income. As a business expenditure, employer-paid premiums for eligible LTCI insurance are deducted from an employee's gross pay. This is true regardless of whether the business gives employees a benefit allowance or pays the premium on an after-tax payroll reduction basis.