Sure! There are long-term care insurance tax deductions to help pay for long-term care insurance…
One thing to know is that the government uses the tax code to influence behavior. If they want you to do something, they will give you a tax break to encourage you to do it.
Since long-term care insurance is a something that helps keep the insured person from relying on public welfare programs if they run out of money and need care it is in the government’s best interest to help people out. This is why the government creates long-term care insurance tax deductions to help pay for long-term care.
And…Who really wants to go on welfare anyway!
I mean…most people pride themselves on being self-reliant their whole life and the thought of having to go on welfare is appalling!
Not to say that public assistance is bad. It is there to help people who fall on hard times from illness and injuries or took too much risk and need to get back on their feet. But to systematically depend on it, or plan on using it in the future… that, to me, is a problem.
Anyway, the government puts incentives in place so that you can take care of potential long-term care needs and not have to go on welfare.
For example, there are State Partnership Plans, when you purchase long-term care the state will pick up the tab when the policy benefits are exhausted
However, to pay for that policy, or any other Qualified Long-Term Care Policy, the government provides incentives to help individuals obtain coverage.
For the rest of this article, I want to go over some of the incentives.
First, if you own a business, you may be able to purchase a qualified long-term care insurance policy and deduct 100% of the premiums on your business taxes just like you can deduct your major medical plans premiums today.
Owners of a C-corporation can deduct 100% of their premiums for themselves and their spouse. If benefits are ever needed, they are available 100% income tax free.
Owners of LLCs, S-corporations, partnerships, or sole proprietors can deduct a portion of their premium based on their age.
If you are not an owner of a business, you may be eligible for a Health Savings Account (HSA). HSA plans can be added to a high deductible major medical health insurance plan for people under the age of 65.
Contributions to HSAs are “pretax dollars” and these accounts can be established at any financial institution. The money can be positioned as cash, like in a savings account, or they can even be invested so there is potential to grow over time.
Making contributions to an HSA reduces your taxable income which reduces the amount of tax you pay. What many people don’t also realize is that these contributions can help you qualify for a number of additional tax credits!
Some of the tax credits you may be increase or become eligible for include:
- Savers Credits
- Earned Income Credits
- ACA Health Insurance Premium Payment Credits
- And in 2020, they may help people quality for more money under the CARES ACT too!
There are many ways to reduce your taxable income and contributing to an HSA is one of them.
When money has been contributed to an HSA, it can be withdrawn 100% income tax free to pay for medical expenses. HSA money can be used to pay copays for doctor visits, insurance deductibles and medications.
Since we are talking about long-term care, another way to use HSA money is to pay for a long-term care service. You can pay for the care itself or leverage that money to buy a long-term care insurance policy which can provide you considerably more money than you contributed.
HSA Deduction Limits
Using the chart above, you can see how much pretax money from an HSA account you can use to pay for a long-term care policy based on your age.
If you don’t have money to contribute to a HSA, you could make a one-time IRA transfer into an HSA making funds that would have been taxable when withdrawn, tax free when used for health related costs.
One concern people have about contributing money to an HSA is the possibility they could lose their money if they do not use it. This is not a concern because contributions to HSA accounts are always 100% yours. HSAs are not FSAs (or Flexible Spending Accounts) and play by different rules.
You can withdraw the money in one of these accounts at any time for any reason. However, if you withdraw money for non-health related reasons before age 65 there is a 10% penalty. After age 65, you can use the money anyway you want without penalty.
Non-medical withdrawals from HSAs are taxed as income, just like IRA withdrawals, and any money left when you pass on goes to the beneficiary you chose. These rules and a lot more are spelled out in IRS Publication 969, Health Savings Accounts and other Tax-Favored Health Plans.
Lastly, if you do not own a business or have an HSA, then you can still deduct long-term care insurance premiums from your taxes based on itemized deduction rules.
Many people choose to use the standard deduction when filing taxes so this may not benefit you. However, know that this tax benefit is a possibility if you itemize deductions.
From a long-term care insurance policy perspective, the amount on the chart from the preceding page is the amount that you could reduce your taxes when itemized. Any out-of-pocket expenses you experience for long-term care are also used in this calculation.
There is a lot to think about when planning for your future care, tax incentives are only one consideration…I wrote a book which has helped many people get their long-term care strategy in place… You can download a free copy of the book right here: Long term care secrets