Federal
Up HIPAA Tax Qualified Federal State

 

Federal Tax

As noted in the other sections, the tax deductions that are listed in this section only apply to Tax-Qualified policies.

Individual

Premium payments to purchase qualified long-term care insurance by an individual - for yourself, your spouse, and your tax dependents (e.g. your parents) are now deductible personal medical expenses if you itemize your taxes [IRC Sec. 213(a)]. Medical expenses in excess of 7 ½% of your adjusted gross income are tax deductible. This means that a portion of your long-term care insurance premium will help you reach the 7 ½% and may even help you to exceed that threshold to receive a tax deduction. Below is a table of the amount of premiums qualifying as medical expenses for the 2003 and 2004 tax years. This is often referred to as the eligible long-term care premium. These increase each year based on the Medical Consumer Price Index.

 

Attained age before the close
of the taxable year
Amount of premium that counts as an
allowable medical expense
 
2003
2004
40 and younger
$250
$260
41 - 50
$470
$490
51 - 60
$940
$980
61 - 70
$2,510
$2,600
Older than 70
$3,130
$3,250

 

Self-Employed

Qualified long-term care insurance premiums are also treated like health insurance for the self-employed tax deduction. Self-employed individuals may deduct 100% of the eligible long-term care premium shown above. The definition of self-employed includes sole proprietorships, partnerships, “greater than 2% shareholders” of S-corporations, or Limited Liability Corporations.

 
Example: Bob, age 61, owns his own consulting firm. His long-term care insurance premium is $1,750 per year. Based on the chart listed under the INDIVIDUAL section, he is eligible to deduct 100% of up to $2,600. Therefore, he can deduct the entire $1,750.

C-Corporations

Premium payments are fully (100%) deductible as a reasonable and necessary business expense- similar to traditional health and accident insurance premiums [IRC Sec. 213(d)1]. This applies to the owners, their spouses and dependents, and all employees.

Employer-paid long-term care insurance is excludable from the employee’s gross income and the benefits received are tax-free.

Partnerships, S-Corporations and Limited Liability Corporations (LLC)

Premium payments purchased for a partner or owner (2%+ shareholder) are subject to the same rules mentioned above for self-employed.

Premium payments for non-partner/non-owner or less than 2% shareholder-employee are 100% deductible as a reasonable and necessary business expense -- similar to traditional health and accident insurance premiums.

Employer-paid long-term care insurance is excludable from the employee’s gross income and the benefits received are tax-free.