A Federal tax qualified long term care insurance policy offers significant tax advantages. Compared to other forms of insurance or retirement savings plans, long term care insurance is unique in that it offers tax advantages both when it is purchased and when benefits are paid out.
If you itemize your taxes, premium payments for qualified long term care insurance are considered a deductible medical expense on an individual’s income tax return (Internal Revenue Code 213(d)). This applies to yourself, your spouse, your children and dependent parents.
The table below shows the eligible premium limits that can be used when calculating your medical expenses for the 2014 and 2015 tax years. These amounts are adjusted annually.
Attained Age Eligible Premium Limits
40 & Younger $420 $420
41 – 50 $780 $790
51 – 60 $1,560 $1,580
61 – 70 $4,160 $4,220
Older than 70 $5,200 $5,270
Self-employed individuals may deduct 100% of the eligible premiums shown above on behalf of themselves, their spouses and dependents. These premiums are deductible as a health insurance expense.
The definition of self-employed includes Sole Proprietorships, Partnerships, “greater than 2% shareholders” of S-corporations, and Limited Liability Corporations.
When a business purchases a tax qualified long term care insurance policy on behalf of its employees, their spouses or dependents, the corporation is entitled to take a 100% deduction as a business expense on the total premium paid. The deduction is not limited to the age-based eligible premium limits.
Partnerships, S-Corporations and Limited Liability Corporations (LLC)
Partners in a Partnership, members of an LLC that is taxed as a Partnership, and shareholders/employees of Subchapter S Corporations who own more than 2% of the Corporation, are taxed as self-employed individuals.
Premium payments for a non-partner/non-owner or less than 2% shareholder-employee are 100% deductible as a reasonable and necessary business expense — similar to traditional health and accident insurance premiums.
Creative funding of long term care insurance policies
It is possible to pay for long term care insurance from a deferred annuity, an immediate annuity, or a Health Savings Account. Payments from these vehicles may be tax favored.