On October 20, 2011, the Internal Revenue Service (IRS) issued Revenue Procedure 2011-52, which included inflation adjustments for the tax deductibility limits of long term care insurance for 2012. The government offers these incentives to assist individuals who have or are considering long term care insurance to take personal responsibility for covering the future cost of long term care services. In addition to the federal government offering these incentives many states are now offering tax deductions or credits for the purchase of long term care insurance.
Taking advantage of these tax incentives can vary based on individual circumstances. The following information is meant to be for informational purposes only. We encourage you to consult with your own tax advisor to address your personal circumstances. Any of the following information should not be considered as tax advice.
2012 Federal Long Term Care Insurance Tax Deductible Limits
|Taxpayers Age at End of Tax Year||2012||2011|
|40 or Less||$350||$340|
|More than 40 but not more than 50||$660||$640|
|More than 50 but not more than 60||$1,310||$1,270|
|More than 60 but not more than 70||$3,500||$3,390|
|More than 70||$4,370||$4,240|
What if I purchase long term care insurance as an individual?
Tax-qualified long term care insurance policies are considered to be a medical expense. Provided an individual itemizes their deductions and their medical expenses exceed 7.5% of their adjusted gross income (AGI) they would be eligible to deduct long term care insurance premiums based on the tax deductibility limits set forth by IRS Revenue Procedure 2011-52 for 2012. The portion of premium exceeding the deductibility limits would be subject to ordinary income tax.
The maximum deductibility limit will be based on the individual’s attained age at the end of the taxable year. The deductibility limits are indexed for inflation and will increase over time.
What if I am self-employed?
Self-employed individuals are eligible to deduct 100% of long term care insurance premiums (subject to the maximum deductibility limits) without having to meet the 7.5% adjusted gross income medical expense requirement. This includes premiums paid on behalf of a spouse or dependents. The amount exceeding the deductibility limits will be taxed as ordinary income.
What if I own an S-Corporation, Limited Liability Company (LLC), or Partnership?
Any individual who is a 2% shareholder or more of an entity that is taxed as a pass through entity and is taxed as self-employed individual can deduct up to 100% of the age based premiums paid by the entity subject to the maximum deductibility limits set forth in IRS Revenue Procedure 2011-52. The individual is not required to meet the 7.5% adjusted gross income medical expense requirement.
Any entity paying long term care insurance premiums on behalf of a non-owner employee can deduct 100% of eligible premiums, not subject to maximum deductibility limits. For non-owner spouses, who are true employees, they would be eligible to deduct the full premium for the spouse’s policy.
What if I own a C-Corporation?
A C-Corporation can purchase a tax-qualified long term care insurance policy on behalf of its employees, or their spouses and dependents, and recognize a 100% deduction as a business expense on all premiums paid. The deduction of premium payments for a tax-qualified long term care insurance policy in a C-Corporation are not subject to the IRS published maximum deductibility limits. In addition, the acquisition of tax-qualified long term care insurance in a C-Corporation is not subject to nondiscrimination rules.
What if an employer pays for a portion or all of an employee’s tax-qualified long term care insurance premiums?
Any premiums paid by an employer on behalf of a non-owner employee are tax deductible as a business expense. The deduction for these premiums is not subject to age-based maximum deductibility limitations. Any premiums paid by an employer on behalf of an employee would not be includable in the employee’s adjusted gross income.
In a situation where the employer only pays a portion of the premiums the employee would be eligible to deduct the remaining premium subject to the age-based deductibility limits set forth in IRS Revenue Procedure 2011-52, provided they are able to satisfy the 7.5% adjusted gross income medical expense requirement.
What if I have a Health Savings Account (HSA) or Health Reimbursement Account (HRA)?
Premiums paid for tax-qualified long term care insurance can be reimbursed from a health savings account (HSA) or Health Reimbursement Account (HRA), subject to the age-based deductibility limits set forth in IRS Revenue Procedure 2011-52.
What if I have a Flexible Spending Account (FSA)?
Tax-qualified long term care insurance premiums are not eligible for reimbursement under a flexible spending account (FSA). IRC Section 125 specifically excludes long term care insurance.
The need for individuals to take personal financial responsibility for long term care services has become increasingly important. Benefits received from a long term care insurance policy are generally excluded from income provided the benefits are used for qualified long term care services. To discuss the options available for your particular situation please request a long term care insurance quote. When determining what tax benefits are available to you it is important to consult with a tax advisor. This content is meant to be informational and should not be relied upon or construed as tax advice. LongTermCareInsuranceInfo.com or any of its representatives provide tax or legal advice.