Note: The Following Data Has Not Be Updated For Several Years And May No Longer Be Accurate Consult A Tax Advisor For Current State Tax Deduction And Credit Rules
Many states offer tax incentives to encourage the purchase of LTCi. Below is a general summary of state specific tax information for your reference. This information is current through December 2011 and is subject to change.
Taxpayers may need to meet state specific requirements to qualify for deductions or credits for LTCi. For information regarding the tax liability of a case, consultation with a tax consultant or legal advisor is recommended.
What The Coding Means* = No Credit Or Deduction. No Broad-Based State Income Tax.** = Same As Federal Tax Law .
ALABAMAALASKA*ARKANSAS**CALIFORNIACOLORADOCONNECTICUT*HAWAIIIDAHOILLINOIS*INDIANAIOWA**KANSASKENTUCKYLOUISIANAMAINEMASSACHUSETTS*MINNESOTAMISSISSIPPIMISSOURIMONTANANEBRASKANEVADA*NEW JERSEYNEW MEXICONEW YORKNORTH CAROLINANORTH DAKOTAOHIOOKLAHOMA**OREGONPENNSYLVANIA*
Benefits Of Reverse Mortgages
Today’s reverse mortgages for those aged 62 and older could be an ideal resource to fund a Long-Term Care Insurance policy OR even provide money to pay for care if you, or a loved one, already needs help and assistance.
Some people have much of their savings invested in their homes. With today’s reverse mortgages, you can find ways to fund care solutions, care itself, even help with cash flow during your retirement.
Learn more by asking questions to an expert. LTC NEWS columnist and host of the TV Show “62 Who Knew” will answer your questions regarding caregiving, aging, health, retirement planning, long-term care, and reverse mortgages.
Just “Ask Mike.” – Reverse Mortgages | LTC News.
Hybrid Ltc Insurance Policies
The last option for funding LTC insurance on a tax-preferenced basis, also introduced as part of the Pension Protection Act of 2006, is to do a 1035 exchange from a life insurance or annuity policy, into a hybrid version of a life insurance or annuity policy that includes an LTC insurance rider. Specifically, PPA 2006 modified the definition of what constitutes a like kind exchange under IRC Section 1035 to stipulate that its permissible to exchange into a life insurance or annuity policy that has an LTC insurance rider, and still be treated as like kind as long as the exchange would have otherwise been permitted into a similar policy without such a rider.
The advantage of this strategy is that, under IRC Section 72, any charges for the LTC insurance rider against the insurance or annuity policy are not treated as a taxable distribution. Instead, the premiums are simply subtracted from the cost basis of the policy.
Given that LTC premiums in a hybrid policy are only subtracted from basis , and the embedded gain is only reduced when actual claims are paid, an exchange to a hybrid policy will be most appealing in situations where there is an existing contract, with substantial embedded gains, and a relatively high likelihood of actually using the dollars for future claims.
Ultimately, the Internal Revenue Code provides a substantial number of different ways to purchase LTC insurance with favorable tax treatment.
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Who Can Claim These Expenses
You can claim as medical expenses the amounts you or your spouse or common-law partner paid for attendant care or care in a facility. The expenses must have been paid for the care of any of the following persons:
- your spouse or common-law partner
A dependant is someone who depended on you for support and is any of the following persons:
- your or your spouse’s or common-law partner’s child or grandchild
- your or your spouse’s or common-law partner’s parent, grandparent, brother, sister, uncle, aunt, nephew, or niece who lived in Canada at any time in the year
Long Term Care Insurance Tax Deductions For Corporations
Tax Deductions for Owners of Partnerships, Subchapter S Corporations, and LLCs
Partners of a Partnership, members of an LLC, or shareholders of greater than 2% of a Subchapter S Corporation are taxed as self-employed individuals. The entity pays the long term care insurance premium. The partner, member, shareholder includes the premium in its AGI. The partner, member, shareholder may deduct the age-based eligible amount on its tax return. It is not necessary to meet the 7.5 % AGI threshold.
Tax Deductions for Owners of Subchapter C Corporations
When a C Corporation purchases long term care insurance on behalf of any of its employees, spouses or dependents, the corporation is eligible to take a 100% tax deduction as a business expense on the total of the premiums paid.
The long term care insurance premium tax deduction is not subject to the age-based limitations in the table above.
The employer may even discriminate and be selective on the class of employees it wishes to elect to cover with long term care insurance benefits.
Recommended Reading: How Do I File My Unemployment Taxes
Irs Reveals 2022 Long
There are several tax benefits available for those who own qualified Long-Term Care Insurance. The IRS has released new deduction amounts for 2022. Taking advantage of tax benefits makes planning more affordable.
Long-Term Care Insurance has multiple tax advantages available for individuals, self-employed, and businesses. The Internal Revenue Service has released the maximum amount taxpayers can deduct as owners of qualified LTC Insurance.
When the Internal Revenue Service announced its annual inflation adjustments for the tax year 2022, some observers raised their eyebrows that the IRS did not consider higher inflation rates as part of their calculation.
Long-Term Care Insurance has attractive tax treatment under Section 7702. In addition to the potential tax deductibility, proceeds from qualified Long-Term Care Insurance remain tax-free even if you can deduct the premium.
Rate Stabilization Rules For Today’s Ltc Insurance
Today’s Long-Term Care Insurance is not only affordable but is rate stable. Rate stabilization rules are in place in most states. Find your state by .
Today’s policies are priced based on the extreme low-interest-rate environment that adds additional rate stability. The chance of future premium increases in the future is small read the article by clicking here.
Hybrid Long-Term Care Insurance either has one single premium or premiums that can be annualized for life or for a period of years. Hybrid premiums cannot increase by contract.
Read Also: How Much Percent Does Tax Take Out
Tax Credits And Deductions For Caregivers
Not every family member is capable of caring for their loved one with a chronic condition, whether its because they have to work, they live too far away, or any other reason. Oftentimes, that means they need to hire someone to manage that persons medical care. If this is the case, a caregiver might qualify for the Child and Dependent Care credit on their federal tax return which can allow them to deduct up to 35% of dependent care expenses paid to your medical care provider.
The eligibility requirements are as follows:
- The caregiver must live with the person they are claiming as a dependent for more than six months.
- The caregiver must file as single, head of household, married filing jointly, or as a qualifying widow with a dependent child.
- The caregiver must have earned some form of taxable income.
Note that hiring someone for long term care services may make you that persons employer, and this would obligate you to withhold a Medicare tax, Social Security tax, and federal unemployment tax.
Different states have their own credits that build on top of this federal credit, so be sure to look into what might be available in your area.
If it is not necessary to hire someone to provide long term care, the following items may be deductible:
Tax Advantages Of Long
4 Min Read | Apr 4, 2022
Youre almost there. Almost ready to sign up for long-term care insurance. But youre just doing a little more research . . .
Well, were about to make your decision super easy. Because if you itemize your deductions, you can count long-term care insurance premiums toward your tax bill.
Yep. You read that right. This means less money going toward taxes, and more money in your pocket.
If youre wondering, Is long-term care insurance tax deductible?, the answer is yes. As long as you itemize your deductions. And while wed never tell you to buy long-term care insurance just to get a tax deduction, if the time is right for you to get coverage, that tax break can come in handy!
Well show you how it works and how much you can deduct.
Recommended Reading: How Much Can You Make And Not File Taxes
How Much Can I Save By Taking The Medical Care Expense Deduction
This is dependent on what your Adjusted Gross Income is and how much youll pay your caregiver. You cant begin itemizing your in-home care expenses until theyre more than 7.5% of your AGI , so some people may save a little bit of money, while others could save thousands. Because of this, you should speak to your accountant or CPA as theyll have a much clearer picture of what your personal tax situation is.
Using the Medical Care Expense Deduction is just part of several pieces that will make up your care budget. While HomePay cant take care of this tax break for you, were happy to be the solution for the household employment tax and payroll needs youll have. Reach out to us today and well onboard your caregiver and make sure your IRS and state tax filing deadlines are always met.
Next Steps:
Tax Deductibility Of Long
Long-term care insurance is a specialty insurance policy that helps cover care expenses such as hospital care, senior living services, and in-home care. LTCI policies are purchased through private insurance companies, and they generally must be acquired by a certain age or before a senior experiences any severe health concerns. Premiums for qualified long-term care insurance may be deductible if they exceed 7.5% of the insureds AGI.
Also Check: How To Check My Tax Return
Dont Put This One Off
If youre 60 or older, nows the time to protect your financial future and get long-term care insurance. Plus, youll get some sweet tax perks along the way.
But it can be tough to figure out exactly what you need. Thats why we created our Endorsed Local Providers program. Its a network of hand-selected independent insurance agents who have the heart of a teacher. Theyll explain your options so you actually understand what youre buying. Plus, theyre RamseyTrusted, so you know youre working with top agents.
This is one to-do list item you dont want to put off. Your golden years could look a lot different without a solid plan in place. Long-term care insurance allows you to enjoy life without wondering how youll pay for long-term care if you need it.
About the author
Ramsey Solutions
Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.
What Expenses Can I Apply To The Medical Care Expense Deduction
Expenses can only be applied if they fit the qualifications just mentioned. For many families with in-home senior care needs, theyll include:
-
The wages paid to the caregiver any time theyre supervising the senior or helping them with activities of daily living.
-
The Social Security, Medicare, unemployment insurance and other employment taxes owed on those wages.
This is important to keep in mind because if the caregiver is only spending 80% of their time supervising the senior and helping them with activities of daily living, only 80% of what you pay them can be applied to the Medical Care Expense Deduction. The remaining 20% of their time spent doing other household chores like laundry and dishes cannot be applied.
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What Long Term Care Expenses Are Tax Deductible
- You can deduct unreimbursed costs for long-term care as a medical expense if certain requirements are met. This includes eligible expenses for in-home, assisted living and nursing-home services. First, the long-term care must be medically necessary. It may include preventive, therapeutic, treating, rehabilitative, personal care or other services.
What Happens After Age 65
Once you turn age 65, you can use the funds in the HSA in any way you wish. While you are no longer required to use the HSA funds only for qualified health care expenses and Long-Term Care Insurance premiums, many people will often continue to do so since the money comes out tax-free.
Plus, you get to use the pre-tax money in the account to also pay for your Medicare Supplement.
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State Tax Deductions And Credits For Long Term Care Insurance
ALABAMAIndividuals are allowed an itemized deduction for qualified long term care insurance contract to the extent that the amount does not exceed specified limitations. The amounts of the itemized deductions are indexed. Business entities, whether incorporated or not, may deduct long term care insurance as reasonable compensation expenses.
ALASKA*
No tax benefits presently
ARKANSAS**A tax deduction is allowed to the limits provided in the Federal Internal Revenue Code
CALIFORNIAA tax deduction is allowed to the limits provided in the Federal Internal Revenue Code
COLORADOA tax credit is allowed for the lesser of $150.00 per policy contract or 25 percent of the premiums paid for long term care insurance during the tax year for the individual and spouse. The Colorado credit is only applicable to those with federal taxable income of less than $50,000 or for two individuals filing a joint return with a federal taxable income of less than $50,000 if claiming the credit for one policy or less than $100,000 if claiming the credit for two policies. The policy must meet Colorado’s definition of LTC insurance.
CONNECTICUT*
No tax benefits presently
HAWAIISame as federal tax law, except subject to 7.5% of Hawaii adjusted gross income, instead of federal adjusted gross income.
ILLINOIS*No tax benefits presently
INDIANA Deduction up to full cost of premium paid for qualified LTCi for taxpayer and taxpayer’s spouse paid in the taxable year.
KANSASNo tax benefits presently.
NEVADA*
Long Term Care Insurance Tax Deductions
The benefits of tax-qualified long term care insurance policies are generally received tax-free by the policyholder.
Your premiums may be tax-deductible or you may qualify for a tax credit.
All Traditional LTC policies and a very limited number of certain hybrid policies with separately identifiable LTC premium components will offer tax deductibility.
The OneAmerica Asset Care, Securian SecureCare and Nationwide CareMatters II hybrid LTC policies will offer tax deductibility.
Lincoln Moneyguard III, Mass Mutual CareChoice, and Brighthouse SmartCare will not offer you any tax deductibility.
Read Also: How To Fill Out Tax Form 8962
How To Deduct Hybrid Life Insurance Policy Premiums
The premium for life insurance policy with a long-term care benefitoften called a hybrid policycan be deductible. But theres a catch. Only the portion of the premium that goes toward long-term care coverage is deductible, Slome says.
For example, the annual premium on a Nationwide permanent life insurance policy that would pay a $5,000 monthly long-term care benefit would be $8,249 for a 65-year-old man, Slome says. Of that amount, about $2,130 would be eligible to count toward medical expenses as a qualified long-term care insurance premium.
Your life insurance policy illustration should show a breakdown of the premium youre paying. If youre considering buying a life insurance policy with a long-term care benefit, ask what portion of the premium would potentially be tax deductible.
Paying Ltc Insurance Premiums From An Hsa
Under IRC Section 223, contributions to a Health Savings Account are tax-deductible, the account grows tax-deferred, and distributions are tax-free when using for qualified medical expenses. And while the HSA qualified distribution rules generally only apply to medical expenses and not medical insurance IRC Section 223 explicitly states that long-term care insurance premiums are eligible.
However, since IRC Section 213 limits the portion of LTC insurance premiums that can be treated as medical expenses to the age-based limits, only LTCI premiums up to those age-based limits can be withdrawn tax-free from an HSA as qualified medical expenses. Which means any excess premiums above the age-based thresholds must be paid out-of-pocket .
In addition, its notable that under IRC Section 223, any medical expenses paid via a Health Savings Account cannot also be claimed later as a medical expense itemized deduction. In other words, LTCI premiums can be deducted as an individual medical expense, or paid for with a tax-free HSA distribution, but never get both favorable treatments for the same premium dollar.
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Two Tax Court Decisions Clarify When Long
Long-term care can be very expensive, but many long-term care expenses can be deducted from your taxes. Two important recent decisions by the U.S. Tax Court provide guidance on when caregiving services are deductible. In one decision, the court ruled that payments to non-medical caregivers are still deductible as medical expenses in the other, the court held that a written agreement is required in order for a deceased woman’s estate to deduct more than $1 million in care that her son allegedly provided her.
In the first case, Estate of Lillian Baral , Lillian Baral suffered from dementia and her doctor recommended that she get 24-hour-a-day care. Her brother hired caregivers to assist Ms. Baral with daily activities. On her tax return, Ms. Baral included a deduction for medical expenses for the payments to the caregivers. The IRS said the expenses were not deductible and asked for more money. Following Ms. Baral’s death, her estate appealed the matter to the U.S. Tax Court.
Local Elder Law Attorneys in Your City
City, State
Under tax law, expenses for medical care may be claimed as an itemized deduction if they exceed 7.5 percent of adjusted gross income. The definition of medical expenses includes the cost of long-term care if a doctor has determined you are chronically ill. “Chronically ill” means you need help with activities like eating, going to the bathroom, bathing, and dressing, or you require substantial supervision due to a severe cognitive impairment.
