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Your chances of requiring some sort of long-term care increase as you age. Long-term care insurance (LTCI) can help you cover your long-term care expenses. Although tax issues are probably not foremost in your mind when you buy LTCI, it still pays to consider them. In particular, you should explore whether your premiums will be deductible and your benefits taxable.

You may be eligible for an income tax deduction

You may be able to deduct all or part of the LTCI premiums you pay for yourself, your spouse, or a dependent. However, only if your policy meets the IRS criteria for a qualified policy. If you bought the policy before January 1, 1997, and it met the requirements of the state where it was issued. It will automatically be considered a qualified policy. If you bought the policy later, it must satisfy several requirements to be considered qualified.

First, the policy must provide coverage only for qualified long-term care services. These include necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services. As well as maintenance or personal care services that are required by a chronically ill individual, in connection with a plan of care prescribed by a licensed health-care practitioner. Second, your policy must satisfy the following conditions. It must:

  • Be guaranteed renewable, meaning that you can renew your policy as needed without undergoing additional medical exams
  • Not have a cash surrender value or any provision that allows you to cash in, pledge, assign, or borrow against the policy, or receive anything more than a refund of premiums paid if you cancel the policy
  • Provide that any refunds and dividends (other than refunds upon termination of the policy) can be used only to reduce future premiums or increase future benefits
  • Not pay for (or reimburse) expenses that are reimbursable under Medicare, unless Medicare is a secondary payer, or unless the policy pays a specified amount per day regardless of actual expenses
  • Meet certain consumer protection requirements set out in the Internal Revenue Code

The amount of your deduction depends on a few factors

If your LTCI policy meets the conditions listed above, or if it was issued before January 1, 1997, at least part of your premium may be tax deductible as a medical expense. To qualify for a medical expense deduction, your unreimbursed medical expenses (including LTCI premiums) must exceed 7.5 percent of your adjusted gross income. Also, you must itemize your deductions.

Watch out–your long-term care insurance benefits may be taxable

A qualified LTCI contract is treated as an accident and health insurance contract. The benefits are typically treated as tax free. However, if your contract pays a set dollar amount per day, the tax-free treatment is subject to a certain limit. It is also indexed annually for inflation. Benefits over and above this limit are generally considered taxable income.

Under this limit, the amount of your LTCI benefits that is excluded from taxation in a given period is figured by subtracting any reimbursement received for the cost of qualified long-term care services during the period from the larger of the following amounts:

  • The actual cost of qualified long-term care services during the period
  • The dollar amount for the period

It’s a different story if you have a non-qualified LTCI policy, though. Such benefits may be subject to income tax.

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.