Long-Term Care Tax Rules and Laws

LTC Insurance is treated like medical expenses under the IRS tax code. There are three basic cases that we will consider

An Individual

According to the tax code, for people who itemize tax deductions, medical expenses are deductible if they exceed 7.5% of adjusted gross income (AGI). For an individual, the portion of the LTC insurance premium that is deductible is determined by the age of the insured.

Example:
Sam is a 67 year old male and owns a tax qualified LTC policy with an annual premium of $2600. He has an adjusted gross income of $50,000 with $5000 of medical expenses ($2800 non-insurance expenses plus $2200 eligible portion of LTC insurance premium).

  • The eligible portion of the LTC insurance premium is $2200 (from table)
  • 7.5% of AGI=$3750 ($50,000 X 7.5%)
  • Allowable deduction for medical expenses=$1250 ($5000 – $3750)

 

Tax Note

  • Benefits received under a tax-qualified long term care insurance policy purchased by an individual will generally not be taxable
  • If an individual purchases a policy on behalf of a parent who is not a dependant – he or she is not entitled to a medical expense deduction.

Partnership or S Corporation

According to our interpretation of the tax code, a self-employed individual in 2000 is able to currently deduct 60% of their health insurance premiums when determining their adjusted gross income. The remaining 40% is not lost; it is allowable as a medical expense similar to the scenario described in our “Individual” example. Also, the eligible premium allowable for the 60% deduction and the remaining 40% are, again, spelled out in the chart in our “Individual” example. The 60% deductible percentage will increase in the coming years as follows:

Year Deductible Percentage
2000 – 2001 60%
2002 70%
2003 & thereafter 100%

C Corporation

According to our interpretation of the tax code, when a C corporation purchases a tax qualified LTC policy, it is treated similar to health insurance premiums. The premiums paid by the C Corporation for their employees or an employees spouse or dependents, is fully deductible as a business expense. Furthermore, even though the premiums are deductible, it appears that this is not subject to any nondiscrimination rules.

  • The premiums are not limited to the eligible premiums described in the previous 2 examples.
  • The premiums paid by the corporation are not included in the employee’s gross income.
  • The benefits paid on a tax qualified long-term care policy will generally not be taxable as income.

The above interpretation is for general informational purposes only. LTCInsurance.com is not intending to present itself as a tax professional, but rather offer our opinion of the tax code as it relates to tax qualified ltc insurance. Visitors are encouraged to consult their tax professional as it relates to their personal situation.