Advantages of Tax-Qualified Long-Term Care Policies

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Advantages of Tax-Qualified Long-Term Care Policies

The law provides tax breaks in black and white to certain insurance policies. These tax-qualified policies are favored as to the premiums paid and the benefits received.

Benefits Received

The law makes clear that benefits from a tax-qualified policy are tax-free if used to pay or reimburse you for long-term care (LTC) expenses that are not covered in some other way.

Premiums Paid

Premiums paid for qualified LTC policies are tax-deductible under some circumstances. Because the deduction is severely limited, however, people often discover it is not a significant tax break. This is first and foremost because LTC premiums are considered a medical expense for income tax purposes.

As such, for most people, a premium dollar is only deductible—if at all—by the amount that total medical expenses exceed 10 percent of the insured’s adjusted gross income. If that threshold is not met, there is no deduction at all for LTC insurance premiums. In other words, this advantage is only available to taxpayers who have fairly high medical expenses and itemize deductions.

There are also age-dependent limits on the amount of LTC premium payments you can include in totaling medical expenses for the year. The chart below assumes that all your other eligible medical expenses for the tax year add up to (or exceed) the current threshold. LTC insurance premiums in excess of that value are deductible, subject to the following limits:

Deduction for Self-Employed

Self-employed taxpayers (and their spouses and dependents) enjoy a valuable advantage regarding LTC insurance premiums. For them, premiums paid for a tax-qualified policy are now deductible "above the line" for adjusted gross income, subject to the limits shown above. This results in a significant deduction the self-employed taxpayer can use whether or not he or she finds it worthwhile to itemize other deductions.

LTC Insurance as an Employee Benefit

The law does not allow an employee to pay his own LTC premiums with pre-tax dollars taken from salary, as with an employer-sponsored flexible spending arrangement or cafeteria plan. But if an employer buys a group LTC policy as an employee benefit, the cost of the coverage is not included in the employees’ taxable income. It is deductible as a business expense by the employer, however, just like medical insurance.