With November being Long-Term Care Awareness Month, and many elder law attorneys working on their personal year-end tax planning, 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 all of the following criteria:
- It can only cover qualified long-term care services, such as: diagnostic, preventative, therapeutic, curing, treating, mitigating, and 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 the 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-employees 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 - 2009 Amount
40 or less $320
41 through 50 $600
51 through 60 $1,190
61 through 70 $3,180
71 and older $3,980
