When developing a comprehensive financial plan, there are numerous factors to consider, such as when to start taking social security benefits. What about your spouse? How should I allocate my portfolio to ensure my long-term goals are met? What money managers should I hire? And the list goes on.
As part of that plan, some people might consider purchasing long-term care insurance to protect their assets in the event they need extensive medical care later in life. Many don’t realize, however, that there could be tax incentives associated with long-term care insurance.
The IRS outlines all of the itemized deductions available long-term care insurance premiums that are considered a medical expense1. In order for all or part of long-term care insurance premiums to be tax deductible, however, a few conditions must be met.
First, Do You Have Deductible Medical Expenses in a Given Year?
As of December 31, 2012, you may deduct only the amount by which your total medical expenses exceed 10% of your adjusted gross income. If you are aged 65 or older, the percentage is lower at 7.5%.2
Hypothetical Example for Someone 65 or Older: Assume your Adjusted Gross Income (AGI) is $40,000, 7.5% of which is $3,000. Also assume you paid medical expenses of $2,500. In this case, you cannot deduct any of your medical expenses because they are not more than 7.5% of your AGI. However, if in this same example, you paid medical expenses of $5,000, then you can deduct $2,000 ($5,000-$3,000).1
Second, You Must Have a Qualified Long-Term Care Insurance Contract
A qualified long-term care insurance contract is one providing only coverage of qualified long-term care services, which include necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, as well as maintenance or personal care services required by a chronically ill individual, in connection with a plan of care prescribed by a licensed health-care practitioner.3 The contract must also:
Be guaranteed renewable, meaning that you can renew your policy as needed without undergoing additional medical exams.
Not provide for a cash surrender value or other money that can be paid, assigned, pledged, or borrowed.
Provide that refunds, other than refunds on the death of the insured or complete surrender or cancellation of the contract, and dividends under the contract must be used only to reduce future premiums or increase future benefits.
Generally not pay or reimburse expenses incurred for services or items that would be reimbursed under Medicare, except where Medicare is a secondary payer, or the contract makes other periodic payments without regard to expenses.
If you have itemized medical expenses to deduct, and your long-term care insurance contract meets the above four requirements, then you can include the below long-term care premiums for each person (you and spouse) as medical expenses on Schedule A (Form 1040):
Deductible Limits Based on Age
|
Age 40 or under |
$350 |
|
Age 41 - 50 |
$660 |
|
Age 51 - 60 |
$1,310 |
|
Age 61 - 70 |
$3,500 |
|
Age 71 and over |
$4,370 |
To note, you can also include unreimbursed expenses for qualified long-term care services.1
Financial Planning Tip: Some long-term care insurance companies offer "shared care" policies, in which two people share one pool of benefits. This may be used to maximize the eligible tax deductibility when there is a difference in ages between the spouses.4
Should You Purchase Long-Term Care Insurance?
Long-term care insurance can potentially help protect your nest egg against excessive cost of care should something happen to you or your spouse. At the same time, it can be costly, so it all depends on your financial resources, your financial plan and your needs. In some instances, Medicaid might cover some of the long-term care expenses, and in other instances you might be able to self-insure depending on your net worth.5
One of our Wealth Managers can help you determine if long-term care insurance makes sense as part of your financial plan, and we can help you evaluate various insurance plans available to you. Give us a call today at 1-800-541-7774 to get started.
Sources:
4 American Association for Long-Term Care Insurance
5 Forbes
Additional Disclosure:
WrapManager, Inc. is not a tax advisory firm. We recommend you contact your tax attorney or CPA prior to utilizing any of the tax-related strategies mentioned or discussed.