State Tax Incentives
For LTC Insurance



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

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) included provisions for favorable tax treatment of qualified Long-Term Care insurance (LTCi) contracts. A summary of Federal Tax treatment is outlined below.

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 client's particular circumstances.

The Association produces generic brochures, updated each year. For information on ordering the 2007 edition of the Business Owner's Guide To Long-Term Care Protection, click here.

• Tax Advantages For Individuals
• Tax Advantages For Self-Employed
• Tax Advantages For Partnership - Limited Liability Company (LLC) - Subchapter S Corporation
• Tax Advantages For C Corporations
• Employer-Pay Contributory Arrangement on Behalf of an Employee
• The Annual Gift Tax Exclusion
• Return of Premium Options
• Health Savings Account (HSA)
• Health Reimbursement Account (HRA)

Individual Purchase of LTC Insurance

Tax-qualified LTCi premiums are considered a medical expense. As such, individuals who itemize tax deductions, medical expenses are deductible to the extent that they exceed 7.5% of 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). Eligible premiums are based on the age of the insured individual and the portion of the premium that exceeds the eligible amount may not be included as a medical expense.

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

The yearly maximum deductible amount for each individual depends on the insured's attained age at the close of the taxable year (Current Limits Table). The eligible deductible maximums are indexed based on the individual's age at the end of the tax year. These amounts increase each year for inflation.

Source: IRS Revenue Procedure: 2006-53

Example: A husband and wife ages 55 and 49 purchase policies. The Eligible amount that the husband can include toward reaching the 7.5% of the Adjusted Gross Income (AGI) threshold is $1,110. The wife (age 49) can apply $550. Note: In two years, when the wife will fall into the 51-to-61 threshold, the higher amounts for both will apply. Plus, remember that these amounts increase annually (while generally their premium will remain level).

Planning Tip: Some LTC insurers offer "shared care" riders to 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.

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

The 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 the individual's 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 or $260-per-day (the 2007 limit).

Self-Employed Individuals

A self-employed individual can deduct 100% of his or her out-of-pocket long-term care insurance premiums, up to the Eligible Premium amounts listed (see Current Limits Table) [IRC 162(l)]. The portion of the LTCi premiums paid that exceeds the Eligible Premium amount is not deductible as a medical expense. The deductible amount includes eligible premiums paid for spouses and dependents. It is not necessary to meet a 7.5% AGI threshold in order to take this deduction. However, self-employed individuals may not deduct LTCi premiums during any calendar month in which he/she or his/her spouse is eligible to participate in a subsidized LTCi plan (where the employer pays all or part of the premiums for LTCi).

Partnership • Limited Liability Company (LLC) • Subchapter S Corporation

In general terms, partners in a partnership, members of an LLC that is taxed as a partnership, and shareholders/employees of Subchapter S Corporations who own more than 2% of the Corporation, are all taxed as self-employed individuals.

When the partnership, LLC or Subchapter S Corporation pays the LTCi premium, the partner, member or shareholder/employee includes the LTCi premium in his/her Adjusted Gross Income, but may deduct up to 100% of the age-based Eligible Premium (see Current Limits Table). It is not necessary to meet a 7.5% AGI threshold.

If the sole shareholder/employee purchases LTCi in his/her own name instead of that of the S Corporation, the S Corporation is not treated as a partnership and the shareholder is not treated as a partner. As such, the shareholder is not treated as self-employed and is only eligible to include his/her eligible LTCi premiums in his/her itemized deductions, which are subject to the 7.5% AGI threshold.

Planning Tip: In a sole proprietor or a partnership situation, the owner/partner who has a spouse who is a true employee can deduct the actual (full) premium for that spouse's policy even if it exceeds the eligible amount.  If that spouse's policy had a shared care benefit rider, that could be included in the deductible premium amount (actual total premium for the spouse would be deductible).

C Corporation - 100% Tax Deductibilit

When C Corporation business purchases a tax-qualified LTCi policy on behalf of any of its owners who are also employees, or their spouses and dependents, the corporation is entitled to take a 100% deduction as a business expense on the actual premium paid. The deduction is not limited to the aged-based Eligible Premiums.

The purchase of a tax-qualified LTCi policy is not subject to any non-discrimination rules, thus allowing an employer to be selective in the classification of employees the business elects to cover.

Planning Tip: Premium payments generally will be tax deductible when the class is based on such factors as the officers of the corporation and length of service (e.g. company pays for all those who are Senior Vice President or higher and have been with the company for 12 or more years). Tax rulings have stipulated that the class cannot, however, be based on stock ownership.

Tax Savings Tip: The use of Ten-Pay or Accelerated Premium LTCi plans provide higher tax deductions for the Corporation and enable the long-term care insurance premium to be fully paid-up by the time the owner retires or sells the business. Thus, the insureds have paid-up long-term care insurance protection without facing ongoing premiums or the possibility of future rate increases.

Selling Tip: Fiscal Year-End Planning for profitable companies with a retained earnings issue is a way to identify bona fide prospects. The fiscal (tax) year for C-Corps generally doesn't end on December 31st (as they do for 'pass through' entities and individuals). At the beginning of the fourth quarter of their Fiscal Year, profitable companies start looking for tax deductions. Recommending 100% tax deductible long-term care insurance as an executive benefit will be valued.

Premiums paid by the business are excluded (not reported) from the employee's Adjusted Gross Income even if the premium exceeds the Eligible Premium amount listed in the Current Limits Table.

An Employer-Paid Contributory Arrangement

When an employer pays all or a portion of the tax-qualified LTCi premiums on behalf of an employee, the amount paid is deductible by the employer as a business expense. The deduction is not limited by the age-based eligible limits. The entire employer paid premium amount would also be excluded from the employee's AGI.

If the employer only pays a portion of the premium, the employee is able to apply the balance that he or she pays towards medical expenses up to their Eligible Premium amount, and would then be entitled to a deduction for medical expenses that exceed 7.5% of AGI.

Long-Term Care Insurance and the Annual Gift Tax Exclusion

In addition to the annual Gift Tax Exclusion (currently $12,000 per donee), a donor has the ability to pay for the medical expenses of the donee [IRC Sec. 2503(e)]. If those medical expenses are tax-qualified LTCi premiums, the exclusion is subject to the age-based limits for Eligible Premium listed (see Current Limits Table). An individual (donor) can purchase LTCi policies for family members (donees) and still maintain the annual Gift Tax Exclusion when selecting a Ten-Pay or Accelerated Payment Option.

Tax Implications of the Return of Premium Option

When a Return of Premium option is elected, any refund paid is included in the beneficiary's gross income and is taxable, to the extent it was either excluded from the owner's income or deducted by the owner. It must be included as income in the year it is received.

LTCi Premiums Paid From Health Savings Accounts (HSA)

Tax-qualified LTCi premiums can be reimbursed through an HSA, tax-free up to the Eligible Premium amounts listed in Table 1, even if the HSA is offered through an employer-provided cafeteria plan.

Health Reimbursement Account (HRA)

Reimbursements for insurance covering medical care expenses, which includes qualified long-term care services and qualified long-term care insurance premiums, are allowable under an HRA. Although employers pay for HRAs, an HRA cannot be provided by salary reduction or and IRC Sec.125 plan. As such, the LTCi premiums cannot be paid on a pre-tax basis through an HRA.

Acknowledgements: The American Association for Long-Term Care Insurance wishes to acknowledge Dave DeBoer, JD, CLU, ChFC, CASL, Advanced Markets, Mutual of Omaha Insurance Company for reviewing this material. Neither these individuals nor companies warrant the information provided herewith. As mentioned previously, always seek the counsel of a professional tax advisor.

Posted September 6, 2007 Subject to change.