Connie's Corner
LTC Drip #3: The New Year's Resolution That's Responsible, Requires No Willpower, and May Be Tax Deductible!
Many New Year's resolutions require almost superhuman resolve. That may be why they keep showing up year after year on our lists! Perhaps it's time to make our list of resolutions shorter... and sweeter.
Many of us understand that when it comes to long term care, there are several compelling reasons to want a private insurance policy in place to pay the bill. However, individuals and business owners may not be aware that the government has sweetened the deal for those are considering the purchase of a policy. Yes, it's true: long term care insurance premiums are deductible for businesses and for some individuals.
The federal deduction for individuals is only available to those who itemize, and are able to take the medical expense deduction on Schedule A (Form 1040). A policy must be qualified for premiums to be eligible for the deduction. The IRS Publication "Tax Changes for Individuals" outlines the maximum amount of long-term care premiums that each individual may be eligible to include as a medical expense in 2010:
• Age 40 or under - $330.
• Age 41 to 50 - $620.
• Age 51 to 60 - $1,230.
• Age 61 to 70 - $3,290.
• Age 71 or over - $4,110 .
Self-employed individuals are eligible for a 100% deduction of qualified long-term care insurance premiums, up to the age-banded limits above. When a C Corporation purchases a qualified long term care insurance policy for an employee, their spouse and/or dependent, the corporation may take a 100% deduction as a business expense on the total premium paid (not limited to the aged-based premiums above).
Long term care insurance as an employee benefit
Although contributions to the cost of long-term care insurance cannot be excluded from an employee's wages subject to federal income tax withholding if the coverage is provided through a flexible spending or similar arrangement, these contributions can be excluded from the employee's wages subject to social security, Medicare, and federal unemployment (FUTA) taxes. This exclusion is also allowed for highly-compensated employees, and S corporation shareholders.
State tax deductions
In addition to the federal tax deduction, some states offer tax incentives for citizens to purchase long term care insurance. There's no surprise as to why, since each state shoulders the bill for Medicaid along with the federal government. People insured by long term care insurance may avoid or at least delay having Medicaid pay their long term care bill. For example, New York has offered a tax credit since 2002. " Not only is the credit still available, but in 2004, legislation was passed doubling the credit for long-term care insurance premiums from 10% to 20%.
Does it make sense to amend your New Year's resolution list? Should "lose weight" be replaced by "consult with an agent about long term care insurance?" Perhaps not, but several things are for sure: by adding long term care insurance you haves a resolution that can be completed quickly, that's an important part of retirement planning, and that may even cut your tax bill!