The Finance of Longevity

New Tax Limits for LTCi

…Something few insurance pros ever discuss

by Jesse Slome

Mr. Slome is the Executive Director of the American Association for Long-Term Care Insurance. Visit here.

Last Friday the IRS issued new limits for the tax deductibility of ’tax qualified’ long-term care insurance premiums. Only traditional LTCi policies have this benefit (the hybrid or linked benefit ones do not … a benefit few (if any) consumers know about (because few, if any, insurance agents or financial advisors ever bring up this benefit!

Granted, with the new tax law I see little (if any) tax benefit when you buy the policies in your 50s/60s. If you are interested … I can explain why.

But even though the new tax law that makes itemizing less valuable for many after age 70 – I believe many can (and will) benefit from the tax deductibility of having LTC insurance. The potential of a $5,270 qualifying expense (deductible) for a single widow …or imagine the value of up to $10,540 expense for a couple where one spouse now has big medical/dental/vision bills.

New 2019 Limits

Here are the new (2019) limits for traditional long-term care insurance premiums (that can be included as “medical care”):

Attained Age Before The Close of the Taxable Year – (2019 Limitation on Premiums)

  • 40 or less ($420)
  • More than 40 but not more than 50 ($790)
  • More than 50 but not more than 60 ($1,580)
  • More than 60 but not more than 70 ($4,220)
  • More than 70 ($5,270)

Long-Term Care Insurance Tax-Deductibility Rules – LTC Tax Rules

Recognizing that government can’t pay the bill for long-term care, federal and a number of state tax codes now offer tax incentives to encourage Americans to take personal responsibility for their future long-term care needs.

If you would like to capitalize on tax advantaged savings available to those purchasing LTC insurance protection, now is the time to start the process. Click here to complete our simple online questionnaire and get the ball rolling.

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) included provisions for favorable tax treatment of qualified Long-Term Care insurance (LTCi) contracts.

The American Association for Long-Term Care Insurance offers this information to help you better understand the various tax implications relating to LTCi policies. This information is provided for informational purposes only and should not be construed as tax advice. Please consult a tax advisor regarding your particular circumstances.

2018 – New Tax Law – Why LTCi offers real benefits after age 70

LTC insurance offers a future tax benefit few seniors are aware of! Tax experts predict fewer Americans will itemize their expenses. But here’s why a traditional, tax-qualified long-term care insurance policy could be enormously beneficial to you — especially when you are 70 or older (and one day you will be 70!). (Note:Linked benefit products (life +LTC or annuity+LTC) do not offer these tax benefits currently.)

The new tax law preserves the medical expense tax deduction allowing the write off of medical expenses that exceed 10 percent (7.5 percent in 2018) of adjusted gross income.

Some LTC insurers offer "shared care" policies where two people share one pool of benefits. This may be used to maximize the eligible tax deductibility when there is a difference in ages between the spouses....

If you are single (alone) after age 70, up to $5,270 (2019 limit) could be counted towards deductible medical expenses. With little (if any) income, that makes this an enormously valuable potential deduction.

If you are married the amount could be $10,540 (2019 figure). Again, your income is likely to be low after age 70 and one of you will likely have medical – dental – vision expenses. Those LTC insurance premiums can now help you reduce your taxes.

Individual Purchase

Tax-qualified LTCi premiums are considered a medical expense. For an individual who itemizes tax deductions, medical expenses are deductible to the extent that they exceed current amount required to meet the individual’s Adjusted Gross Income (AGI). The amount of the LTCi premium treated as a medical expense is limited to the eligible LTCi premiums, as defined by Internal Revenue Code 213(d), based on the age of the insured individual. That portion of the LTCi premium that exceeds the eligible LTCi premium is not included as a medical expense.

Individual taxpayers can treat premiums paid for tax-qualified long-term care insurance for themselves, their spouse or any tax dependents (such as parents) as a personal medical expense.

The yearly maximum deductible amount for each individual depends on the insured’s attained age at the close of the taxable year (see Table 1 for current limits). These deductible maximums are indexed and increase each year for inflation.

Example:
A husband and wife ages 55 and 49 purchase policies. The Eligible amount that the husband can include toward reaching the currently required threshold for deductible health (medical) expenses is $1,530 (2017 limit). The wife (age 49) can apply $770. Note: In two years, when the wife will fall into the 51-to-61 threshold, the higher amounts for both will apply. And, these amounts are increased annually.

Planning Tip: Some LTC insurers offer “shared care” policies where two people share one pool of benefits. This may be used to maximize the eligible tax deductibility when there is a difference in ages between the spouses.

An Important Fact To Keep in Mind
Individuals must health qualify in order to obtain long-term care insurance protection. Once you qualify, you will not lose your coverage even if (or better said when) your health changes. Government data shows that at older ages (after age 65) many people have medical expenses that they itemize on their tax returns. So while you may not be able to deduct LTC insurance premiums in early years, you may find they become deductible in the future … at a time when that tax deduction really becomes very valuable to you.

Tax Savings Tip: Long-term care insurance premiums may be paid from a Health Savings Account (HSA) up to the limits shown above.

Taxability of Benefits Received: Generally, benefits received from a tax-qualified LTCi policy that was purchased by an individual are non-taxable and therefore excluded from Adjusted Gross Income. Benefits paid under an indemnity policy are not taxed unless they exceed the higher of the cost of qualified long-term care will be $370-per-day (2019 limit).

A link to where we post valuable info on LTCi and tax benefits:  www.aaltci.org/tax