IRS increases Long Term Care insurance deductibilty

Individuals and business owners who own a tax qualified Long Term Care insurance (LTCi) plan are eligible for a tax deduction. The IRS in Section 213(d)(10) consider these premiums includible in the definition of “medical care” and based on an age based schedule to determine the amount of the premium which is deductible. The updated amounts for 2013 are:

-•- age 40 and under = $360

-•- 41 through 50 = $680

-•- 51 through 60 = $1,360

-•- 61 through 70 = $3,640

-•- 71 and older = $4,550.

How does this work?

Individuals can, when completing their annual 1040, add the allowed amount to other medical expenses they have. Any amount of medical expenses, including the LTCi premium, above 7.5% of their AGI becomes a deduction. Federal health reform changed this to 10% for 2013 taxes.

Employers have, when this special family protection is purchased through the business, additional tax advantages. IRS tax regulations provide employers more flexibility than with health insurance as follows:

  • A Sole Proprietor can deduct up to the age based schedule amount. It is not subject to the AGI limitation applied to individuals.
  • A Partnership, or in an LLC , can take the full premium as a business expense. The owner(s) then take the age based amount as a personal medical expense deduction. Premium amounts above the schedule would generally become taxable income to the owner.
  • Incorporated businesses: The entire premium is a business expense and there is no taxable income to the employee when the premium is paid or when benefits are received.
  • One special advantage in the IRS’s Long Term Care tax regulations is the ability to allow a plan to be purchased just for the owner and spouse or select executives such as Vice Presidents and their spouses.

The value some individuals received from their policy is highlighted in this Life and Health Insurance Foundation for Education (LIFE), which is an educational foundation, booklet.

Individuals living in Connecticut – Call (860) 739-0005 and a copy will be mailed to you.