It’s officially Long-Term Care Awareness Month! We continue our series on what you need to know with the tax advantages of long-term care insurance.
Tax-Qualified Standalone Policies
If you are considering a traditional pool-of-funds product, you’ll also want to be sure that it is tax-qualified. With tax-qualified policies benefits paid are tax free and premiums may be deductible depending on how policyholders file taxes.
For a deduction on federal taxes, policyholders must itemize deductions on Schedule A (Form 1040). The IRS eligible premium based on age can be included as medical expenses. The total qualified medical expenses over 7.5% of adjusted gross income can be deducted.
Many states allow a deduction or credit on state taxes.
Partnership provisions are only available with tax-qualified standalone policies and provide additional protection for assets from Medicaid resource reduction requirements.
The way partnership works is that whatever amount your insurance paid for your care, on a dollar-for-dollar basis your assets are protected from Medicaid resource reduction requirements. The key requirement for a policy to qualify for partnership is that it has the required age-based inflation protection. Not all states offer partnership policies. Depending on wealth, partnership can be a very important component to consider.
Hybrid Policy Tax Advantage
Provisions of the Pension Protection Act allow the use of a 1035 exchange transaction to fund long-term care insurance premiums in a tax-advantaged way using the cash value in life insurance or annuities to fund the hybrid product designs. This can be done without creating a taxable event.
Many hybrid products offer tax-qualified optional LTC riders which may also be tax-deductible.
If you start now, you can get your plan in place by the end of the year.
See the previous blog posts in this series:
