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With the end of the year fast approaching, now is an excellent time to discuss the favorable tax treatment of long-term care insurance ("LTCI") premiums.

The Internal Revenue Code categorizes LTCI contracts as either qualified or non-qualified.  In order to be qualified and receive favorable federal income tax treatment of premiums, a LTCI contract must meet the following criteria:

• It can only cover qualified long-term care services, such as: diagnostic, preventative, therapeutic, curing, treating, mitigating, rehabilitative services, and maintenance of personal care services.
• A licensed health-care practitioner must certify that the insured cannot perform at least two activities of daily living without substantial assistance, or requires substantial supervision for safety reasons as a result of a cognitive impairment (i.e. Alzheimer's).
• It generally does not cover any expenses paid by Medicare.
• It is guaranteed renewable and does not provide for a cash surrender value.
• It must offer certain consumer-protection provisions.

Assuming the plan is qualified, taxpayers who itemize their deductions may deduct the lesser of the premiums paid or the amount reflected in the following Age-Based Deduction Chart.  For LTCI premiums to be deductible, the taxpayer's unreimbursed medical expenses must exceed 7.5% of his or her adjusted gross income.  As for business owners, such as sole proprietors, partners, and shareholder-employee of S corporations, they may deduct the lesser of premiums paid or the age-based deduction limit, without having to itemize or meet the 7.5% floor for unreimbursed medical expenses.  Additionally, shareholder-employees of C corporations have the best opportunity, in that corporate paid LTCI premiums are excluded from an employee's income - the age-based deduction limits do not apply - and are fully deductible to the corporation.

For example, if John Smith buys LTCI through his C corporation, the premium is not included in his income.  Also, if the premium is $3,000, the out-of-pocket cost after the corporation's tax deduction would only be $1,980.  Furthermore, employer-paid LTCI plans are not subject to nondiscrimination rules.  So, corporations can design plans to cover only executive and key employees.

Age-Based Long-Term Care Insurance Premiums

Age at End of Taxable Year       Premium Limit - 2011 Amount
40 or Less                                     $340
41 Through 50                              $640
51 Through 60                              $1,270
61 Through 70                              $3,390
71 and Older                                 $4,240