Frequently Asked Questions - LTC Taxes
Yes. Self-employed individuals – including sole proprietors, partners, and individuals who hold more than 2% of the shares of a subchapter S corporation – can deduct “eligible premiums” paid for qualified long term care (LTC) insurance plans as a business expense. As shown in the table below, LTC insurance premiums eligible for deduction are subject to certain age-based limits that are adjusted annually based on increases in the medical care component of the Consumer Price Index.
|Age Before Close of Tax Year||Premium Deduction limit for|
|2009 Tax Year||2010 Tax Year|
|40 or younger||$320||$330|
|41 to 50||$600||$620|
|51 to 60||$1,190||$1,230|
|61 to 70||$3,180||$3,290|
|71 or older||$3,980||$4,110|
No. The tax code stipulates that the value of employer-provided health coverage (including long term care insurance) is excludable from an employee’s gross income.
Yes. LTC insurance premiums paid for any non-owner employees are fully deductible.
Benefits paid to an individual under a federally tax-qualified LTC insurance plan are excluded from taxable income as long as they don’t exceed the greater of either the IRS’s tax-free cap on benefits ($280 per day in 2009) or actual long term care expenses. Benefits up to the tax-free cap will always be tax-free, regardless of expenses incurred. Benefits in excess of the tax-free cap will be tax-free to the extent that they do not exceed actual long term care expenses.
For benefits exceeding the cap to be tax-free, they must be applied to long term care expenses. If the insured cannot demonstrate that the benefits were spent on such expenses, a portion of the benefits may be taxable. For example, if an insured receives an annual benefit of $110,000 but only spends $90,000 on long term care, up to $20,000 could be taxable. If the daily tax-free cap for the year in question is $290 per day ($105,850 annually), then $4,150 of the benefits will be taxable (the difference between the $110,000 received and the tax free cap of $105,850). On the other hand, if the daily tax-free cap in the year is $310 per day ($113,150 annually), then none of the benefits will be taxable.
Benefit payments under an indemnity contract are tax free up to a daily cap or the cost of actual services, whichever is greater. The tax-free cap may be reduced by other reimbursements, such as another LTC insurance policy or Medicare. For the tax year 2009, the tax-free cap is $280/day. Benefit payments from a reimbursement contract have no tax-free cap, because such benefits will never exceed actual expenses. Reimbursement contract benefits are also required to coordinate with Medicare.
Long term care insurance plans that meet certain legal requirements qualify for certain federal tax benefits. These benefits relate both to the deductibility of premiums paid (either by an employer or an individual) and to taxability of any benefits received.
For most individuals, a TQ plan will offer the best option and most plans available in the LTC market today are tax qualified. Therefore, before purchasing an NTQ plan, you should carefully review its features to ensure that it meets your needs. Ordinarily, you will be able to find the most important benefit features in a TQ plan, and such a plan is likely to meet your needs best.
I have a long term care insurance policy that was issued prior to the Health Insurance Portability and Accountability Act (HIPAA). What is the tax treatment and can I make changes to the policy.
Under HIPAA, all long term care insurance policies issued before January 1, 1997 were grandfathered, and automatically receive favorable tax treatment. However, under IRS regulations, a change to a grandfathered LTC insurance policy may jeopardize its tax-qualified status. Before making a change to any grandfathered LTC insurance policy, you should consult your tax advisor and assess the impact of the change on the tax-qualified status of the policy.