LONG TERM CARE: TAX BREAKS NOW AND IN THE FUTURE

None of us know what the future has in store, and it can be especially difficult to contemplate the possibility of our own failing health or that of a loved one. But, uncertainty and ambivalence shouldn’t prevent us from thinking about the future and preparing for it. As the American population ages and longevity increases, the need for long term care will likely grow. According to the U.S. Department of Health and Human Services,70% of people turning age 65 can expect to use some form of long-term care during their lives .1

Long Term Care Insurance FactsThe good news is that there is a financial tool that can help families pay for long term care expenses. Long term care insurance provides a daily benefit that can help cover the costs associated with a nursing home, an assisted living facility, an adult day care center, or home health care. There are many types of long term insurance policies, some of which may allow you to keep more of your savings, offer increased options for care, and help you maintain your independence, while alleviating the financial and caregiving burden on family members.

In addition to these advantages, long term care insurance can provide tax benefits, both now, when you are paying premiums, and in the future, when you are receiving benefits. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) provides that long term care insurance policies should generally receive the same favorable income tax treatment (within prescribed limits) as accident and health insurance contracts. Here are some key points to consider:

Like premiums for regular health insurance, premiums for qualified long term care policies can be deducted as a medical expense, subject to the general 10% of adjusted gross income (AGI) floor for medical expenses. However, it is important to note that the amount that qualifies for the medical expense deduction is limited according to the age of the insured. The qualified deduction, to be indexed for inflation in future years, is subject to the following annual limits in 2015.2

       Age (Before Close of Tax Year)           Limitation    

       40 or less                                               $380

       41 to 50                                                 $710

       51 to 60                                                 $1,430

       61 to 70                                                 $3,800

       More than 70                                          $4,750

Benefits received under a qualified long term care policy are generally income tax free because they are considered insurance reimbursements for medical expenses.

Long term care expenses unreimbursed by insurance are deductible as medical expenses (subject to the 10% of AGI floor). These expenses are not deductible if a relative provides the services, unless the relative is licensed to provide such services.

For some people, these tax incentives can help make long term care and long term care insurance more affordable. Keep in mind that proper planning today may increase options for future care and help preserve assets for the future.  Long Term Care Insurance should feature in your tax planning strategies for retirement. For more information and tax advice according to your unique circumstances, consult with your qualified tax professional.

1 U.S. Department of Health and Human Services, http://longtermcare.gov/(accessed May 2015).

2 IRS Revenue Procedure 2013-35 (2014 limits) and 2014-61 (2015 limits). (accessed May 2015).