Is Long Term Care Insurance Tax Deductible?

The federal government and some state governments recognize the significant financial burden providing long term care services to individuals will be. As a result the federal government and number of states have enacted certain tax benefits to encourage individuals to purchase long term care insurance, and take personal financial responsibility to address their long term care needs.

Tax-qualified long term care insurance can provide individuals and business owners with a number of tax advantages. Under current tax law individuals can deduct a portion of their long term care insurance premiums based on maximum deductible limits established by the federal government, defined under Internal Revenue Code 213(d). In order for individuals to be eligible to deduct a portion of their long term care expenses they must itemize their deductions on their federal income tax return, and have combined medical expenses in excess of 7.5% of adjusted gross income (AGI).

The maximum deductible limits are based on an individuals age at the end of the taxable year. These limits are indexed and are adjusted annually for inflation. The following table outlines the 2011 Federal Tax Deductible Limits:

Taxpayer’s Age at End of Tax Year – Deductible Limit
40 or less$340
More than 40 but not more than 50$640
More than 50 but not more than 60$1,270
More than 60 but not more than 70$3,390
More than 70$4,240

Source: IRS Revenue Procedure: 2010-40

For self-employed individuals 100% of their long term care insurance premiums, up to the maximum deductible amount, are deductible. The portion of premium that exceeds the maximum eligible deductible amount is not deductible as a medical expense. Deductible amounts include premiums paid for spouses and dependents. As a result, it is not necessary for a self-employed individual to meet the 7.5% AGI requirements in order to be eligible for the deduction.

Are Long Term Care Insurance Policy Benefits Taxable?

Benefits received from a tax-qualified long term care insurance policy are typically tax free provided they don’t exceed the greater of your maximum long term care daily expense or the per day limitation of $300 in 2011 (Source: Section 7702B. Internal Revenue Code (IRC)).

Are Out-of-Pocket Long Term Care Expenses Tax Deductible?

Generally, expenses for long term care (i.e. home care services, nursing home care, etc.) may be claimed as a medical deduction on your income tax return. The only exception to this is expenses incurred for home care provided by a family member. Payments to family members for providing care are not deductible unless the family member is a licensed health care professional.

The above information is not intended to be tax advice. Please consult your own tax advisor to address the tax benefits for your particular situation.