More than 8 million people in the United States today are covered by long-term care insurance. It's a tool that helps people handle their long-term medical and wellness care.
By having insurance protection, you'll have the opportunity to handle the financial obligations that this brings. Since these costs add up tremendously over time, this insurance is an excellent investment to have.
Is long-term care insurance tax deductible? Below we'll explain this and several other key points.
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Long-term care insurance tax deductions allow you to write off a percentage of the premiums that you pay for these plans. The rate is set every year, and big changes are in store for the 2023 calendar and tax year.
In 2023, the rates for long-term care insurance tax deductions rose by roughly 7%. You will be able to take advantage of these deductions on your tax return once you file.
Knowing these deductions can help you get a handle on your long-term care plan, which you can also balance with things like Medicare and Medicaid.
A lot goes into how you can accept this deduction, which is why people in the demographic of those with long-term care needs should have a strategy for how they take advantage of these deductions on their taxes.
This allows policyholders to take advantage of both their insurance and tax obligations.
Before exploring long-term care insurance tax benefits, get to know how the IRS guidelines determine your tax deductibility. This will give you an idea of what you can write off on your return.
Age is one of the biggest factors that play into whether or not you can deduct your long-term care insurance on your taxes. The eligibility goes up the older that you get.
For instance, in 2023 if you are 40 years old or younger, you are able to deduct a maximum of $480. This is an increase of $450 from the previous year.
For people aged between 41 and 50, you are able to deduct a maximum of $890. This is an increase of $850 from 2022.
For people between 51 and 60 years old, you get to deduct a maximum of $1,790. This is an increase of $1,690 from the year 2022.
If you are between the ages of 61 and 70 years old, you are able to deduct a maximum of $4,770. This is an increase from $4,510 from the previous year.
People 71 years old and up can deduct up to $5,960. This is an increase of $5,650 from 2022.
Aside from age, you'll need to consider the classification of your tax filing. These tax credits are available to people who are self-employed, the owners of Limited Liability Companies (LLC), partnerships, S-Corporations, and professional associations (PA).
The IRS also gauges your adjustable gross income (AGI) when considering these write-offs. If you meet the threshold, you might be able to write off your insurance premiums as medical expenses.
Your deductibility also depends on whether or not you have a qualified long-term care insurance plan. In order to be considered a qualified plan, the policy must meet certain criteria, including a medical certification that the necessary care will last at least 90 days.
Something else to consider is registering for a tax-qualified long-term care policy. These are plans that include built-in federal tax advantages.
It gives you a clean and organized opportunity to deduct your annual premiums on your taxes, particularly if you itemize your medical and long-term care deductions.
By calculating your medical expenses in this policy, it becomes easier to deduct them and potentially get a refund for your troubles. If you happen to get a non-tax-qualified policy, the proceeds that you get from your plan could potentially be considered taxable income.
When your LTC plan is tax-qualified, it is easier for you to avoid this, so that you receive a built-in tax break.
Each state has different regulations and requirements for tax-qualified long-term care policies. You will need to check into the regulations where you live to know for sure where you stand with your LTC insurance policy.
Once you have determined that you are eligible for a deduction, make sure that you know how to write these premiums and expenses off on your taxes. Take inventory of your long-term care expenses from the previous year. From there, make sure that you also add up the total amount of premiums that you pay, and compare that with how much you are allowed to deduct depending on your age.
From there, take account of the Adjusted Gross Income (AGI) threshold for yourself, or your household if you are married and filing jointly or separately.
Self-employed professionals are able to deduct their premiums without needing to itemize. Grab a Form 1040 from the IRS and include the totals that you calculated so that you can appropriately write these off on your taxes.
The medical deductions that you can and can't take advantage of will depend on how you take your long-term care insurance deduction. If you don't itemize, you aren't able to deduct these expenses.
The main way to handle this is by comparing your standardized deduction with the number of medical expenses that you racked up and seeing which is the most advantageous. If you can deduct more by itemizing, it makes more sense to take this route for your medical expenses.
In 2023, the standardized deduction that you can receive as a single tax filer is $13,850, which is up from $12,950 the prior year. If you are married and filing jointly, the deduction that you can receive in 2023 is $27,700, which is an increase from $25,900 the prior year.
The Head of Household can take a $20,800 standardized deduction in 2023, which is up from $19,400 the prior year.
Check with the insurance policy to see what specific forms of care are covered. For example, mental illnesses generally aren't covered, but you might be able to get coverage for cognitive issues, like dementia and Alzheimer's. Look into the plan prospectus so that you know for sure.
Yes, tax deductibles for the long-term care that you receive can potentially differ by state. Federally, the deductions in place for premiums are set each year, regardless of what state you are in.
However, many of the other variables that go into these plans may differ depending on where you live. For starters, you might need to obtain a certificate that shows that you are no longer able to take care of certain aspects of your care.
This includes matters such as bathing, dressing, taking care of your eating and food prep, handling bathroom activity, and moving you around from one point to another.
Each state will have its own requirements for proving this, both of which come into play when you are ready to take a deduction.
Where this differs is that you might get different deductions depending on your state taxes. Certain states have their own statewide tax deductions that you can take advantage of, so make sure that you are up-to-date with the amount that you can deduct where you live each year.
Some states offer incentives such as 25% of your long-term care insurance premiums or 80% of your premiums if you are self-employed. Factor this in when you are calculating your state taxes.
There are a variety of companies that might pay for employees' long-term care insurance. Corporations are among those, which is why they have the opportunity to write off long-term care insurance premiums for plans that they provide for their employees.
If you run a corporation and provide long-term care insurance for employees, you are able to write it off as a business expense. Unlike individuals, there are no limits for age for corporations.
When these plans are paid for by corporations, these contributions are also excluded from the employee's adjusted gross income.
The key is that the corporation must not retain any sort of interest in the policy. If you run an S-Corporation and pay out these premiums for your employees, the premiums are 100% deductible for your company.
Taking advantage of these deductions will allow your company to reduce its overhead and operating costs each year, particularly if you have multiple employees that are utilizing LTC insurance plans.
This deduction is applied to Schedule C during tax time. Keeping tabs on these sorts of deductions is critical to reducing a company's tax bill while also making sure that employees are taken care of.
First off, what is a hybrid policy? This is a type of policy that mixes a combination of both life insurance and long-term care insurance benefits.
In general, you are not able to deduct premiums that you pay for hybrid insurance policies. The plans include cash considerations for people to take care of their needs if they happen to run into some medical needs throughout the course of the policy.
Since these plans are not tax-qualified upfront, you can't deduct the premiums the way that you would with other policies. If you need extensive long-term care, it's typically best to get a plan that specifically covers what you need so that you're covered on both ends.
All in all, you should recognize that your long-term care insurance premiums are tax-deductible as long as you have an insurance policy that meets the qualifications. This is critical information for someone who requires long-term care of any kind, and you should do your due diligence when shopping around for the plan that best suits your care needs.
When in doubt, ask the company upfront about their tax-deductible plans and what you have to do to take advantage of these credits. By looking out for these details upfront, you will not only be able to manage the cost of your medical and wellness needs but will also be able to get a financial break for your troubles.
Make sure to check with a certified public accountant (CPA) or other tax professional that can help you out with your filings or any questions that you may have as well as ensure you are maximizing your available deductions.
Use your insurance to the best of your ability by making sure that you have the best team of professionals available to assist you. This lets you stay comfortable and informed while all of your most important medical needs are covered.
Our content is created for educational purposes only. This material is not intended to provide, and should not be relied on for tax, legal, or investment advice. Everdays encourages individuals to seek advice from their own investment or tax advisor or legal counsel.