Tax Benefits of Long Term Care Insurance
Those who are still scratching their head whether to get long term care insurance or not, there are good reasons why you have to purchase it now. Did you know that you can reap tax benefits out of your long term care insurance?
Tax Benefits for Qualified Policies
Qualified long term care policies are subject to federal income tax breaks, and it can also qualify for state income tax breaks (depending on the state where the policy is purchased). All qualified policies must be certified renewable without cashing out any amount. Most insurance companies nowadays sell qualified policies, but don’t to forget to ask how the tax break works and its rules.
Qualified Policy Benefits are Income Tax free
Benefits that are paid out in qualified policies are generally federal income tax free because they are considered reimbursement for medical expenses. In 2009, this tax benefit works on benefits of $280 per day and above. The benefits above the cap are still accepted as federal income tax free, provided that they would not surpass the total long term care expenses. If you collect the long term care insurance benefits in a certain year, you should receive the next year a Form 1099-LTC that elaborates the total amount of benefits. The taxable amount of benefits shall reflect on Form 8853 which should be attached to Form 1040.
Age Limits Can be Considered as Deductible Medical Expenses
Most qualified LTC policies are recognized as medical expenses subject for deduction. However, there are age-based caps used as basis on the amount of deduction. If your premiums go beyond the age-based caps, you can only add up the capped amount as medical expense. You should also include the premiums covered for your spouse or any dependents. As of 2009, the capped amount based on age limits is as follows:
40 or under = $320
41 to 50 = $600
51 to 60 = $1,190
61 to 70 = $3,180
Over 70 = $3,980
Count your qualified LTC premium amount (exclusive to the cap if applicable) and add the sum with your other medical expenses such health and dental insurance premiums and other unreimbursed medical expenditures. If the sum exceeds 7.5% of your adjusted gross income (AGI), you can disregard the excess as an itemized medical deduction on Schedule A of Form 1040. For self-employed, you can deduct the qualified LTCi policies on page 1 of Form 1040 whether you itemize or not. Premiums for non-qualified LTC policies are non-deductible.
Tax Advantage for Employers and Self-employed
The tax deduction normally benefits the employers and the self-employed. If you are a sole proprietor, a partner, owner of an S corporation or LLC, or just a small business, you can reduce the 7.5% threshold and deduct the premiums up to an amount that increases with age. Owners of C Corporation can declare the entire premium as tax deductible.
The amount of money you can save depends largely on the tax bracket. Self-employed individuals in the 30% tax bracket who use the tax schedule may hoard up to 20% or more of tax benefits on LTC premiums. Those who have their entire premiums deducted enjoy the most. However, it is always advised to consult an accountant or tax attorney to understand the tax benefits.
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