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Do You Have to Pay a Long-Term Care Tax?


Since long-term care insurance is expensive, only 7% to 10% of Americans have a long-term care policy. According to the Department of Health and Human Services, more than 50% of us will need long-term care at some time in our lives. Medicare pays for the first 100 days in a long-term care facility. After that, if there is no private family support and no long-term care insurance, the patient either must leave a nursing home or arrange for Medicaid to pick up the cost. Most policyholders who become claimants don’t pay a long-term care tax if they have a qualified plan.

Consider working with a financial advisor as you make and update a retirement plan that includes a provision for long-term care.

Understanding Qualified Long-Term Care Insurance

If you have a long-term care insurance policy, it is either a federally tax-qualified long-term care insurance policy or a non-qualified policy. If you have the former, there are tax breaks that come along with it.

Qualified plans are those where the patient must be chronically ill and that is certified by a licensed healthcare professional. The services must be administered in a long-term care facility and administered by a licensed healthcare professional. Qualified plans also allow for a certain level of in-home care.

Long-Term Care Insurance: Tax Implications

Long-Term Care Tax

Long-term care insurance gets attractive tax treatment under Section 7702(b) of the IRS tax code. Depending on the provisions of your plan and whether it is a qualified long-term care plan, your premiums, and your spouse’s, may be tax-deductible. They are part of your medical expenses for tax purposes. If you itemize deductions, you will see that one section is for medical and dental expenses. If the annual cost of your premiums plus your other medical expenses are more than 7.5% of your adjusted gross income (AGI), you can count the excess toward your total itemized deductions.

The amount of the premium that you can count annually depends on your age. For 2022, if you are under 40, you can count $450. If you are at least 40 but not more than 50 you can deduct $850. If you are at least 50 but not more than 60, you can deduct $1,690. For those at least 60 but not more than 70 you can deduct $4,510. If you are over 70, you can deduct $5,640. For tax year 2021 (which you file in 2022), the amount of the premium you can count as one of your medical and dental expenses on your federal tax return is the same as the 2022 amounts, with one exception: In 2021, if you are at least 60 but not more than 70, you can deduct $4,520.

If you are self-employed, including the 2% owners of LLCs, PAs, S-corporations, C-corporations and partnerships, these age-indexed amounts can also be deducted by the owners, spouses and dependents. For employees who are non-owners, their spouses and dependents, the premium amounts are deductible as a business expense. Benefits paid to the policyholder, or the long-term care facility, are not taxable under qualified plans.

There are some long-term care insurance policies that are not qualified for these tax-deductible benefits. They are the indemnity policies that pay a flat amount for long-term care per day, regardless of actual expenses. For those policies, $390 is the per diem limit for 2022. Anything over $390 per day is subject to taxation. For 2021, the per diem was higher at $400.

Tax Implications for Combination Policies

If you own a combination, or hybrid, policy containing both life insurance and long-term care benefits, the tax-deductibility of the premium is in question. The benefits are still not taxable. Since these policies have both long-term care benefits and a death benefit, their tax treatment is different. The insurance company issuing the policy must be able to break out how much of the premium is for life insurance and how much is for long-term care. Check with your insurance company. If they can’t do that, you can’t take advantage of any of the premiums as part of your itemized deductions.

Some of the hybrid policies have accelerated death benefits for chronic illness. These plans are not eligible for tax-deductibility under the IRS tax code.

Bottom Line

Long-Term Care Tax

According to the Administration on Aging, those people over 65 years of age have a 70% chance of requiring long-term care at some point. Even though long-term care policies are notoriously expensive, the federal tax benefits you will reap will partially cover these expenses. If you are looking at a combination policy with life insurance, you may not reap as much since there are exclusions. Check with the insurance company and determine which type of policy is best for you.

Long-Term Care Tips

  • Creating a retirement plan that includes long-term care insurance can be complex. In addition, figuring out taxes on related medical expenses can make things that much more difficult. A financial advisor’s insight and guidance can be invaluable as you tackle this job. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Do you need to know how much life insurance you need? Check out SmartAsset’s life insurance calculator for assistance.

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