Ah, tax time.  We all dislike it, almost as much as we dislike paying taxes.  I've always said it would be a whole lot different if they gave us our entire check first and then asked for it back.  But I digress.  This article covers your long term care insurance premiums and how they may be able to save you some pain at tax time.  First, let me give you the bad news. Many long-term care insurance policyholders who file a non-business return may find it impossible or difficult to deduct their paid-up premiums from their taxable income for federal income tax purposes.  There are ways that anyone can qualify, but for most it is not possible.  Ask your CPA so you are sure.  We are not giving tax advice here, only food for thought.

Good News: Some LTC Can be Deductible. 

Now for the good news.  Few people realize that even if you cannot take a deduction for long term care insurance on federal tax returns, many US states and even the District of Columbia offer a little respite.  Increasingly, states have special tax deductions or tax credits for long-term care insurance. Why woudl the states offer these incentives?  Well, they have a dog in the fight.  That is, they provide incentives to purchase long term care insurance because the states share the job of paying for Medicaid’s long-term care benefit - which pays for 50% of all long term care - with the federal government.  Because of this, more and more state legislators and administrations know that LTC insurance policyholders will save the state money by not using Medicaid benefits in the future.

Specifics on the Federal Long Term Care Deduction 

Now we will take a look at exactly how the federal deductibility works.  Because federal tax rates are higher, this can be a much more important deduction to study and try to qualify for.  It all goes back to a law passed in the 1990s, the Health Insurance Portability and Accountability Act (HIPAA).  This legislation defined what is called a "qualified long-term care insurance policy," and HIPAA made the premiums eligible as a deduction.

Qualified premiums are premiums that do not exceed the age-based limits shown below, and are based on the taxpayer’s age as of December 31st of that tax year.

Qualified long term care insurance premiums for an individual taxpayer, his or her spouse and eligible dependents are deductible medical expenses (assuming the taxpayer files an itemized return), but only to the extend that those premiums, when added to all other unreimbursed medical expenses, exceed 7.5 percent if the taxpayer’s adjusted gross income.

Maximum long-term care premium limits for taxpayers

The other positive news here is that businesses may also find that they can deduct long term care insurance premiums they pay for their employees, including spouses and legal dependents in the same way that they deduct health insurance premiums.

The even better news is that the aged-based limits referenced above do not apply to businesses.  Ready to start a small business yet?  These premiums are also generally not considered taxable income to the employee.  So, because owner/employees of C-corporations are usually treated as “employees” for these purposes (hence the main reason for the C-Corp), meaning that premiums are deductible to the corporation and thereforce are not included in the insured’s income!

Owners of businesses structured to pass income and losses directly through to the individual owners, such as  S corporations and partnerships, may also be able to fully deduct qualified premiums (subject to the age-based limits) paid for themselves, their spouses and legal dependents on their individual tax returns.

Standard disclaimer here... with any federal or state tax-related question, you will want to ask your CPA about your particular situation, as only they can provide you tax advice.