LTCi Part 6: Tax Treatment for Individuals

LTCi Part 6: Tax Treatment for Individuals

Jun 02

This is the sixth in a series of blogs on the topic of Long Term Care Insurance. I have broken them down into smaller segments since this is such an important and extensive topic.

Congress wants you to buy long-term care insurance.  The way they hope to inspire you to buy it is by giving you tax deductions.  The problem, however, is that when the government gets involved, it giveth and it can taketh.  The way they have set up the tax treatment for long-term care insurance is to favor the business owner more than the individual.  In this blog, we’ll look at the tax benefits for the individual and in the next blog the tax benefits for the business.

An individual can deduct the cost of LTC insurance up to a limit that the government sets based on your age.  An individual aged 51-60 can deduct $1271 of premium, while an individual over 70 can deduct over $4240 of premium for 2011.  The full table and tax treatment is covered in greater detail in the book “Naked in the Nursing Home”.

The catch, however, is that the premium, like the cost of health insurance, must exceed 7.5% of your adjusted gross income (AGI).  So if you’re a high earner and your AGI is high, the deduction may actually disappear.  This is where the taketh occurs.

If you have an HSA plan, you can deduct your premium in full through the HSA plan and then reimburse yourself for the premium from the same HSA plan.  In this way, you will have deducted the premium but it won’t be subject to the 7.5% threshold.  To benefit from the ability to deduct your premium, the policy must be a TQ (tax-qualified) policy.  The best part of a TQ policy is that the government can never tax your benefit (a good giveth).

Naked in the Nursing Home has a full explanation of the tax treatment.