Last week, we posted an article about the importance of long term care in protecting your assets. This week, I will discuss more specifically the tax benefits of having a long term care contract.
Long Term Care Insurance is Tax Deductible?!
Huh? There are tax benefits? Really? Is long term care insurance tax deductible?
Absolutely! Depending on your situation. Unlike carrying car or home insurance, the tax code allows for deductions of the premiums that you pay for you long term care insurance. However, there are limitations. Let’s take a look at what the IRS allows.
First, we must look at the structure of the long term care contract. The IRS states that the policy must be a “qualified” policy. What makes the policy qualified?
- The policy must be guaranteed renewable.
- The policy cannot have a cash surrender value or other money that can be paid, assigned, pledged or borrowed.
- The policy must provide that refunds must be used only to reduce premiums or increase future benefits.
- The policy must not pay or reimburse for expenses that Medicare would normally cover, with exceptions.
Next, depending on your age, the premium that you can deduct is limited. These limits are subject to change on an annual basis. Currently, the limitations range from $370 for a person under the age of 40, all the way up to $4,660 for anybody age 71 and older.
Last, we must look at whether you can take the standard deduction, or if you have enough in deductions to take the itemized deduction. Long term care contract premiums are considered a medical deduction. Medical deductions can only be taken to the extent that they exceed 10% of adjusted gross income. If the allowable medical deductions plus your other itemized deductions exceed the standard deduction, you are on your way to receiving tax benefits to paying your long term care contract premiums. There are other limitations to itemizing, but those again will be discussed at a later time.
Each state also has different regulations on what premiums can be deducted on your state tax return. Contact your tax professional for more information.
Interested in learning more about long term care, what options are available to you, and how it will affect your specific tax situation? Call (608) 825-7882 and ask for Emily.