Federal Tax Benefits of Long-term Care Insurance
FEDERAL TAX INFORMATION
Long -Term Care Insurance Premium Deductions for Individuals
Individuals have two potential income tax deductions for Long-term Care Insurance premiums: itemized medical expenses and self-employed health insurance. The premiums would be treated as a medical expense for purposes of itemizing medical expenses, subject to the limits described below. The amount of premium paid for the coverage of the individual, spouse and dependents may be deducted to the extent that total medical expenses for such persons exceed 7.5% of adjusted gross income. The annual limits on the deductible amount of long-term care premium for each covered person is age-based, as follows:
|Attained Age End of the Taxable year||2022||2023|
|Age 40 or less||$ 450||$480|
|Ages 41 - 50||$ 850||$890|
|Ages 51 - 60||$1,690||$1,790|
|Ages 61 - 70||$4,510||
|Ages 71 and older||$5,640||$5,960|
Source: IRC Section 213(d)(1)(D), 213(d)(10)
MSA and HSA – Eligible LTCi premium is considered a qualified medical expense. IRC Section 223(d)(2)(A), 213(d)(D), IRC 213(d)(1)(D) If one spouse has the H.S.A., those funds can be used to pay age-based premium noted in above table for both spouses. Medicare premiums can be paid only from an account whose owner is 65 or older.
Tax Information for Self-Employed Individuals
Self-employed individuals, including sole proprietors, partners and more than 2% shareholders of an S-Corporation, are permitted to deduct 100% of the eligible, age based premium under tax qualified LTC plans. Qualified LTC Premiums are treated as health insurance premiums and are permitted to be deducted for the taxpayer, his spouse, and dependents. (IRC Section 162 (1)).
2022 and 2023 Per Diem Indemnity Benefit Limitation
The per diem limit is the daily amount of benefits under a Tax-Qualified plan that can be received tax-free if the policy pays on an indemnity basis, that is, without regard to the expenses incurred. The per diem limit for year 2022 is $390/day and $420 for 2023 [IRC §§104(a)(3), 7702B(a)(2), 7702B(d)] Benefits in excess of the per diem limit may be received tax-free if such benefits do not exceed the expenses actually incurred.
The full amount of employer paid long-term care insurance qualifies as an accident and health plan within the meaning of IRC §7702B(a)(3). This means that the premium is fully deductible, IRC §162(a), excluded from employee's income, IRC §106(a) and benefits remain tax-free! An employer may select which employee's premiums the company will pay. Discrimination rules do not apply.
STATE TAX BENEFITS OF LONG-TERM CARE INSURANCE
DISTRICT OF COLUMBIA
Effective 1/21/05, permits a deduction from gross income the amount an individual pays annually in long-term care premiums, provided that the deduction shall not exceed $500.00 per year, per individual whether the individual files individually or jointly. Section 47-1803 (b-1) of the DC Official Code
Individual Tax Credit
A one-time credit is allowed for first time buyers of long-term care tax-qualified insurance. The amount of credit allowed is an amount equal to 100% of the eligible premium, not to exceed $500. (Chapter 242, Section 10-718)
Tax Credit for Employer-Provided LTC Premiums
A credit is allowed against the state income tax for employers providing long-term care insurance up to an amount equal to 5% of the costs incurred by the employer as part of the employee benefit package. The credit may not exceed $5,000 or $100 for each employee. (Art. 6-117, Chapter 7)
A credit equal to 15% of premiums paid by the individual not to exceed over the life of any policy 15% of the amount of premiums paid for the first 12 months of coverage. If credit exceeds individual income tax liability for the tax year, excess can be carried over for credit for the next 5 years or until credit is used. A deduction, from federal adjusted gross income in calculating Virginia taxable income, for premiums not claimed on federal tax return or a credit for the premiums.
NOTE: This information is presented as a guide only. Please consult your tax advisor to discuss specifics.