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Tax Considerations of Long Term Care Insurance

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:
Bob is a 68 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).

1. The eligible portion of the LTC insurance premium is $2200 (from table)
2. 7.5% of AGI=$3750 ($50,000 X 7.5%)
3. Allowable deduction for medical expenses=$1250 ($5000 - $3750)

Tax Note

Partnership or S Corporation

According to our interpretation of the tax code, a self-employed individual in 2002 is able to currently deduct 70% of their health insurance premiums when determining their adjusted gross income. The remaining 30% 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 70% deduction and the remaining 30% are, again, spelled out in the chart in our "Individual" example. The 70% deductible percentage will increase in the coming years as follows:

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 above interpretation is for general informational purposes only.  Visitors are encouraged to consult their tax professional as it relates to their personal situation.


 

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Last modified: 05/11/10