Traditional long-term care insurance (LTCI) policies that meet the IRS requirements are treated as tax-qualified policies. These policies can generate tax breaks for clients, but those breaks depend on the client’s circumstances. (Non-tax-qualified policies don’t provide any tax advantages.) Here’s what you need to know.
LTCI policyholders who itemize their deductions and have unreimbursed medical expenses that exceed 10 percent of their adjusted gross income can deduct eligible LTCI premiums. (Eligible premiums are age-based; see IRS Publication 502 for the current limits.) The hurdle for taxpayers age 65 and older is 7.5 percent of AGI through 2016. Those conditions mean that few policyholders will ever claim that deduction, according to Scott Olson with LTCShop.com in Yucaipa, CA.
“Nobody has medical expenses that high,” he said. “If they do, they probably can’t qualify for long-term care insurance. So, for somebody who’s a (IRS Form) W-2 employee, there’s not going to be much hope in terms of getting any pretax dollars or income tax benefits unless they live in a state that has a nice credit.”
Jayne Van Zile, CLTC with JVZ Strategies in Rochester, NY, has not seen any W-2 employees claim a deduction for their premiums. If the client did have that level of medical expenses, she notes, it’s likely they would qualify for a waiver of premium on their LTCI coverage. The group that does get a tax break for is self-employed who show a net profit, she adds. Sole proprietors can deduct eligible LTCI premiums as accident and health insurance and they can include premiums paid for their spouses and eligible dependents, regardless of the AGI percentage threshold.
“A perfect example is a professor who does some consulting on the side and generates, say, $10,000 of income annually on a 1099 basis,” she said. “That professor can take the premium and if they’re between 51 and 60 years old, that person plus their spouse can reduce their adjusted gross income in 2015 by $1,430 a person or if they’re 61 or over, it jumps to $3,800 per person.”
State Tax Credits
As Olson pointed out, some states provide incentives in the form of tax credits or deductions for residents’ LTCI premiums. The American Association for Long-Term Care Insurance (AALTCI) summarizes the available state-level tax breaks on its website. Some states provide little or no financial incentive to buy LTCI but others are generous. For example, New York residents are entitled to a 20 percent tax credit on any tax-qualified LTCI premium paid regardless of income, age, or premium, said Van Zile. The catch is that the taxpayer must have a New York State tax liability—policyholders can’t receive a credit greater than the amount of tax they owe. “It is a significant benefit and I have found clients take this into account when determining their out-of-pocket costs,” she said.