Long term care insurance can do more than provide needed funding to pay for your skilled nursing care if you need it; it also offers several potential tax benefits to policyholders.
1. Individual Deductions. The amount you pay to keep your long term care insurance policy in-force is considered a medical expense. If you itemize your deductions, your premium payments, when added to other medical expenses, may help you get over the 10 percent hurdle to be able to deduct medical expenses if you are employed by someone else.
If you are self-employed (whether part-time or full-time), this benefit is even more attractive. That’s because you get to deduct your premiums off the top of your income. If you’re paying premiums for a spouse and/or dependents, you may be able to deduct those amounts paid too.
There are limits for 2017 on the total amount of premiums that can be deducted.
2. Tax Treatment of Cash Value Life Insurance and Nonqualified Annuities Used to Pay Premiums. If you are withdrawing interest from an annuity contract or from a cash-value life insurance policy, you may be able to use those funds to pay for long term care insurance on a tax-free basis.
3. State Income Tax Benefits. Your state may offer incentives for purchasing long term care insurance. In some states, these are tax credits, which go to directly reduce what you owe. In other states, you can take a tax deduction. New York State, for example, has a 20% pure tax credit on long term care premiums.
4. Tax treatment of Benefits. Generally speaking, when you receive payments from your long term care insurance policy for your care, you do not have to report those benefits as income in the year received.
5. Premiums Paid Through a Business. When a business, rather than an individual, pays long term care insurance premiums, those premium payments do not need to be included in the employee’s income. Additionally, the IRS treats claim payments as reimbursed medical expenses, which are not taxable. So, the business gets to count the premium payment as a pre-tax expense, and those premiums are not taxable income to the employee. There are certain limits that apply to business owners using their corporation to pay for their own long term care premiums.
There are many reasons to consider purchasing a long term care insurance policy. For some people, favorable tax treatment is an important factor in deciding to purchase a policy. To learn more about LTC tax benefits and request a quote, contact us today.