There are numerous compelling reasons to consider the purchase of long term care insurance. Although the distinct tax benefits of these policies is not the most significant of these, a discussion of potential tax advantages may serve as a motivational tool. I'll outline the key tax implications of long term care insurance policies – but of course - you should consult with your own tax advisors.
TAX IMPLICATIONS OF TAX QUALIFIED POLICIES:
In general there are two types of long term care policies that are available- tax qualified policies (TQ) and non tax qualified plans. Although the IRS has not ruled definitively on the taxability of benefits received from a non tax qualified policy, they have definitely determined the preferential treatment of tax qualified LTCI policies.
Most, but not all, of the plans being offered by insurance companies today are TQ policies.
There are differences that should be noted between the two types of plans:
Non-Tax Qualified policies. The contract wording of non-tax qualified policies is generally a bit more liberal than the TQ plans. With a non TQ policy, benefits may be paid when any one of three triggers happens:
· Care is medically necessary, or
· Inability to perform 2 of 6 activities of daily living, or
· Cognitive impairment
Tax Qualified Policies. With the Tax Qualified policies, the first trigger (medically necessary care) is eliminated. In addition, a health care professional must certify that the care is likely to last 90 days (i.e. it is truly long term care); in addition, the wording of the two triggers is a bit more stringent (although somewhat unclear)
· Need for SUBSTANTIAL assistance with 2 of 6 activities of daily living, or
· Require SUBSTANTIAL supervision due to presence of SEVERE cognitive impairment
The Health Portability and Accountability Act of 1996 enabled the IRS to treat TQ long term care insurance policies like accident and health insurance and are treated as a deductible medical expense under Code Section 213(d).
Medical expenses are currently limited to the excess over 7.5% of a taxpayer's adjusted gross income. (IRC sec. 213 (a) ).
Qualified LTCI premiums are premiums that do not exceed the age-based limits established by the IRS as listed below. These limits are adjusted annually for inflation.
Eligible Long Term Care Insurance Premiums
Age attained before 2007 Maximum Deduction
Close of Tax Year Per Individual
40 or less $ 290
41-50 $ 550
51-60 $1,110
61-70 $2,950
71 and older $3,680
Many states offer tax credit or an income tax deduction for LTCI premiums paid.
In addition, long term care benefits are received tax-free up to $260 per day in 2007 (IRC sec. 7702B(d) ) and may be tax free for more than that if the actual expenses exceed that amount.
Self-employed
A self-employed individual may deduct 100% of the eligible premium for a qualified LTCI policy as an above-the-line business expense if:
· The business pays the premium, and
· The individual is not covered by a LTCI policy maintained by the individual's or spouse's employer (whether or not the individual or spouse actually participates).
Corporations, Professional Corporations and Profit Organizations
C Corporations may deduct all premiums for tax-qualified LTCI for its employees, their spouses, and eligible dependents (IRC sec. 152).
Even premiums in excess of the age-based limits described above are deductible.
A plan may be selective, covering one or more employees/spouses and there may be different plans for different employees or classes of employees/spouses.
Partnership and limited liability coMPANIES
Generally, a partnership or LLC may deduct all premiums it pays for LTCI for its employees, their spouses and eligible dependents (IRC sec. 152 and 162).
The premium is not included in the employee's income.
The partnership may pay the premiums for partners.
As long as the LTCI premiums are paid without regard to partnership income, they will be considered "guaranteed" payments under IRC sec. 707(c).
Therefore, they will be deductible by the partnership and includable in the partners' incomes.
The partners are then treated by the IRS as self-employed persons and follow the guidelines for self-employed persons with LTCI.
S Corporations
The tax treatment for S Corporations depends upon whether or not the participating employee owns more or less than 2% interest in the S Corporation.
If the participating employee does not own more than 2% interest on any day during the tax year, the entire TQ LTCI premium for the employee, spouse and dependents is deductible by the business as long as the premium is paid by the business.
The premium is not included in the employee's income.
If the participating employee does own more than 2% interest in the S Corporation, the employee is treated like a partner of a partnership, i.e. premiums are deductible by the corporation and included in the employee's income. The employee is then treated by the IRS as a self-employed person and follows the guidelines for a self-employed person with LTCI.
Contributory arrangements
If an employer and employee split the cost of a long term care insurance policy, the employer receives the same federal income tax treatment on the portion of the LTCI premium it pays that it does on the entire premium in a situation where the employer pays the entire premium.
Health Savings Accounts and Long Term Care Insurance
The Medicare Act of 2003 which enables individuals to create HSAs , allows contributions to an HSA to be made on a pre-tax basis.
In addition, withdrawals for qualified medical expenses are made tax-free.
TQ LTCI premiums are a qualified medical expense (IRS Notice 2004-50, Q and A 41). As such, an individual may withdraw money tax-free from their HSA to pay TQ LTCI premiums (with the age-based limitations listed above).
CONCLUSION:
In some situations it may be wise for children to pay premiums on such coverage for their parents – particularly if the burden would be shifted to the children in the event care is needed but not affordable by their parents.
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www.MintcoFinancial.com
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