The need to be protected from escalating costs for long-term nursing care as we get older is well documented. About 70% of Americans are expected to need these services in our lifetimes. Traditional Long-Term Care insurance (LTCi) is expensive, and new underwriting standards are tightening, making it more difficult than ever to purchase LTCi at all.
How to cover the cost of actual long-term care is a dilemma for many people. When a traditional LTCi policy is purchased, the premiums are generally based on age at purchase. Premiums remain steady for life, subject only to possible across-the-board increases for the entire policyholder class. Premiums are usually waived during any period in which benefits are being paid under the policy. That’s the first good news. Also in the good news department is the tax deductibility of some premiums.
Rules for tax deductibility of LTCi premiums vary according to age and policy ownership. Here are a few of the possibilities:
- First, the only LTCi policies that have deductible premiums are called tax-qualified plans, so ask the carrier before purchasing if the policy is tax-qualified
- Almost all recent plans are tax-qualified
- If premiums are deductible, there are limits on the amount of the deduction, depending on age and ownership, so be sure to check the IRS guidelines, which are reasonably generous, particularly for people over 60
- Rules are different (usually better) when a business is involved
- If an employer pays the premiums, that employer can deduct the cost, without adding that cost to the employee’s income
- Be careful if you are the business owner, as the rules for you will probably be more restrictive
- For sole proprietors, premiums are deductible, subject to age limit restrictions, but not subject to the Above-10% of Adjusted Gross Income (AGI) limitation
- Partnerships, as well as LLCs taxed as partnerships, can pay the premiums, but the partners will have their premiums added to their partnership taxable income shares
- Sub-S businesses are similar to partnerships, assuming the owner has more than 2% of total company ownership (stock owned by immediate family members counts as ownership to you)
- C-Corps are treated more traditionally, as the premiums are simply treated as tax-free benefits when paid by the company directly to the insurance carrier
- Premiums paid through a Cafeteria Plan are added to the employee’s W-2 income, and can then be deducted personally on tax returns
- For people with HSA accounts, premiums can be paid tax-free from the HSA, up to the deductible limits by age
Traditional LTCi is expensive, because long-term nursing care is expensive. Whatever tax breaks are available to you will increase affordability of a traditional LTCi policy. Our concern is that the government is working its way out of helping taxpayers afford the cost by eliminating the entire medical deduction in 2020. Our sincere hope is that Congress comes to its senses and restores the status of the medical deduction permanently. Stay tuned.
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