Buying certain types of insurance policies can sometimes impact your tax situation. It’s good to check with your insurance agent and tax advisor to understand the tax treatment of a long-term care insurance policy.
In this article, we cover everything you need to know about the tax treatment of long-term care insurance premiums and policy benefits, including:
- Are long-term care insurance premiums tax-deductible?
- Long-term care insurance deduction limits
- State long-term care tax incentives & credits
- The self-employed can deduct long-term care premium costs
- Employer-paid LTC premiums for employees are deductible
- Are long-term care insurance benefits taxable?
Let's get started.
Premiums that an individual pays on a long-term care insurance policy can qualify as a deductible medical expense. To deduct your premiums from your federal income taxes:
- The policy must be tax-qualified, which most policies are. Your insurer can confirm if your policy is tax-qualified.
- The policy must be guaranteed renewable and not provide any cash surrender value.
- The policy does not pay or reimburse expenses that would be reimbursed under Medicare.
- You itemize your deductions.
- Your medical expenses must exceed 7.5 percent of your adjusted gross income, and you can only deduct expenses that exceed that amount. For example, if your adjusted gross income is $100,000, you must have $7,500 or more of deductible medical expenses to get a deduction. If you have $10,000 in medical expenses, you can take a $2,500 deduction ($10,000 - $7,500).
Non-qualified long-term care policies have no tax benefits, but they also have fewer restrictions. They typically have less restrictive rules for triggering benefits and they don’t usually include a waiting period to receive benefits.
There is a limit to how much of your long-term care insurance premiums you can use to qualify for the medical expense deduction. For 2021, qualified long-term care premiums, up to the amounts shown below, can be included as medical expenses on Form 1040, Schedule A, Itemized Deductions, or in calculating the self-employed health insurance deduction:
- Age 40 or under: $450
- Age 41 to 50: $850
- Age 51 to 60: $1,690
- Age 61 to 70: $4,520
- Age 71 and over: $5,640
If you have a Health Savings Account (HSA), you can use it to pay for long-term care insurance premiums up to the limits listed above. However, you can not use a flex spending account (FSA) to pay for premiums. Also, your policy premiums cannot be purchased with pre-tax dollars under an employer-provided cafeteria plan.
Many states also have tax deductions or credits for long-term care insurance.
For example, New York offers a tax credit of up to $1,500 for taxpayers whose adjusted gross income is below $250,000 beginning in 2020. Any qualified policy covering long-term care services that was approved in New York and issued before January 1, 1997, also qualifies for favorable tax treatment with certain limited exceptions.
Minnesota provides a credit equal to 25 percent of qualifying long-term care insurance premiums for one beneficiary, up to a maximum of $100 for individuals and up to $200 for married couples filing jointly who both have coverage.
North Dakota’s credit is equal to the premiums paid during the tax year, up to a maximum credit of $250 per qualified individual.
AALCTI has a complete list of state tax incentives and credits for long-term care insurance, but note that its website states the information is only current as of December 2011.
If you are self-employed, you can also deduct 100 percent of your long-care insurance premium, up to the amounts listed above. This includes premiums paid for spouses and dependents.
However, self-employed individuals can not deduct long-term care insurance premiums during a period in which they were eligible to participate in a subsidized plan, such as one paid for by an employer.
Learn More: How Much Does Long-Term Care Insurance Cost?
Other types of businesses
The following business owners are also taxed as self-employed individuals: partners in a partnership, members of a limited liability company (LLC) that is taxed as a partnership, and shareholders/employees of Subchapter S Corporations who own more than 2 percent of the corporation. The partnership, LLC, or Subchapter S Corporation pays the premium.
The partner, member, or shareholder/employee includes the long-term care insurance premium in their Adjusted Gross Income but may deduct up to 100 percent of the policy premium as listed in the individual policyholder section.
If an employer pays all or a portion of LTC premiums for employees, the entire amount is deductible as a business expense to the employer. There are no limits or caps on deductibility. In addition, the employer contribution is not included in the employee’s taxable income.
If the employer and employee split the cost, the employee can apply their share toward their medical expense deduction, up to the maximum amount listed above.
Long-term care insurance premiums carry the same tax treatment as health insurance premiums. Similarly, the benefits of an LTC insurance policy have similar tax treatment as health insurance benefits.
IRS Publication 525 states that money received by a policyholder for “personal injury or sickness” generally is excludable from a person’s taxable income.
Even though your benefits are not taxable, the insurance company may send you tax forms in the year(s) you receive policy benefits. That’s because the IRS requires insurers to provide claimants with a 1099 that reports payments made under the contract. If you receive benefits during the year, you should get a 1099 in January of the next year when you receive your other tax forms.
Chances are if you receive this form, you will not have to report the benefits you receive as taxable income. You may want to check the IRS website or your tax preparer.
The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.