The Internal Revenue Service (“IRS”) is increasing the limit on the federal deduction for premium payments made on long-term care insurance policies in 2014.
Tax Benefits Depend on Insured’s Age
Taxpayers who itemize their deductions on their annual income tax return were able to take tax deductions for premium payments made on “qualifying” long-term care insurance policies. These premium payments qualify as “medical expenses,” and are deductible to the extent that total amount of taxpayer’s medical expenses exceed 10% (7.5% for taxpayers aged 65 and older through 2016) of the taxpayer’s adjusted gross income. However the deduction may only be taken up to certain limits, based on the taxpayer’s age. The changes for 2014 increase those limits, as shown in the table below:
| Insured’s Age | 2013 Limit | 2014 Limit |
|---|---|---|
| 40 or below | $360 | $370 |
| 41 – 50 | $680 | $700 |
| 51 – 60 | $1,360 | $1,400 |
| 61 – 70 | $3,640 | $3,720 |
| 71 + | $4,550 | $4,660 |
More Significant Benefit for the Self-Employed
For self-employed taxpayers, the advantages are more significant. As long as the self-employed tax payer made a net profit for the year, she can take the amount of the premium – up to the limit for her age – as a deduction, even if the policy premium was less than 10% of her adjusted gross income.
Per Diem Excludability Limits Also Increased
If you’re currently receiving fixed payments payments from per diem or indemnity policies, which pay a predetermined amount each day, the amount of this payment you can exclude from income will also increase. For 2014, taxpayers receiving these benefit payments need only include in income the amount exceeding their total qualified long-term care expenses, or $330, whichever is greater (the 2013 amount was $330).
What is a “qualified” long-term-care insurance policy?
To qualify for tax-advantaged treatment, policies issued on or after January 1, 1997 must meet certain criteria:
- Policies must offer the consumer the choice to elect protection from inflation and “nonforfeiture,” although the consumer may choose not to purchase such protection.
- The policies must begin to provide coverage when the insured can no longer perform, or needs assistance with, at least two out of the six “activities of daily living.” These include eating, toileting, transferring, bathing, dressing, and continence.
- Further, the policy must provide coverage when the insured has been certified to require substantial supervision to protect her from threats to health and safety due to a “cognitive impairment.”
Policies purchased before January 1, 1997 are “grandfathered” and treated as “qualified” as long as they have been approved by the insurance commissioner of the state in which they are sold. Individual policies often require this approval, while many group policies do not.
Consumers should be aware of these factors when contemplating the purchase of long-term-care insurance, and should seek financial and legal advice to determine whether policies meet state and federal requirements.