As an incentive for people to take financial responsibility for their long term care, HIPPA[i] provides for deductibility of qualified long term care (LTC) expenses and excludes from taxable income your qualified long term care benefits[ii]. Higher deduction limits for LTC premiums are geared to help out retirees make payments. Let’s see what the tax advantages are.
First, when you’re able to deduct insurance premiums, you’re generally taxed on their benefits – i.e. their payout. And that’s the case for long term care insurance.
Long Term Care Insurance Deductions From Income:
You can add long term care expenses paid for both qualified long-term care services and premiums for qualified long-term care insurance products to your medical expense deduction on your Schedule A of your IRS form 1040.
The IRS’s definition of qualified long-term care services are those necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, rehabilitative services, and maintenance and personal care services that are required by a chronically ill individual and provided through a plan of care prescribed by a licensed health practitioner.
Someone’s chronically ill (i.e. needing long term care) when within the last 12 months, a licensed health practitioner has certified him or her as unable to perform at least 2 of the ADLs (activities of daily living – dressing, eating, toileting, transferring, bathing, and continence) without help for at least 90 days.
Qualified Long-Term Care insurance contracts are those that provide only coverage of long-term care services. They must be guaranteed renewable and must not provide for a cash surrender value that can be paid, assigned, pledged or borrowed. And lastly it must not pay for expenses that would be reimbursed under Medicare, except as a secondary payer.
The amounts of these LTC premiums you can include in medical expenses are limited though. But they increase substantially with age. Refer to the table
LTC Exclusions From Income
Your LTC benefits are generally excludable from taxable income as long as they’re used for qualified long term care services (e.g. nursing home, home care, personal care and maintenance services). The excludable amount for any 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 cost of qualified long-term care services during the period.
- The dollar amount for the period ($320 per day for any period in 2013).
|Long Term Care (LTC) Insurance Tax Advantages|
|LTC premium deduction limits|
in medical expense deductions (2013)
|40 or under||$360|
|41 to 50||$680|
|51 to 60||$1,360|
|61 to 70||$3,640|
|71 or over||$4,550|
|LTC Insurance benefits exclusions|
|2013 LTC insurance Benefits Exclusion from Income:||$320 per day|
JD Smith, representative, securities offered through Lowell and Company
[i]The Health Insurance Portability and Accountability Act (HIPPA) of 1996
[ii] Source: IRS Revenue Procedure (2013 limits)