Save money on long term care insurance by paying for your policy with tax-deferred money in your cash-value life insurance or annuity.
In addition to taking advantage of the many long term care insurance discounts and tax savings, there are two more strategies to help you save even more money on your long term care insurance. These two strategies both take advantage of recently passed legislation to pay for long term care insurance premiums with tax deferred insurance policies.
Long Term Care Insurance Paid With Cash Value Life Insurance Policies Or Annuities
On August 17, 2006, President George Bush signed the Pension Protection Act of 2006 into law. This legislation included features to encourage savings and provides favorable tax treatment for funding long term care insurance. Beginning January 1, 2010, owners of annuities and cash value life insurance annuity can use their policies to pay for long term care insurance premiums tax-free, regardless of account basis. Therefore you can now use tax-deferred gains in your cash value life insurance policy or annuity to fund long term care insurance premiums. Since qualified long term care expenses are paid tax-free by your long term care insurance policy, this means that tax-free dollars are paying for tax-free benefits in retirement.
This legislation is most advantageous for owners of cash value life insurance and annuity policies who have realized significant tax-deferred gains. These policy holders can now use the accumulated cash value in their policies to pay for long term care insurance premiums tax-free through a 1035 exchange. Since policy gains are not taxed and long term care insurance benefits are paid tax free, this is another strategy to save thousands of dollars on long term care insurance.
Your Tax Free Dollars Can Pay For Tax Free Long Term Care Benefits
Long Term Care Insurance Paid With Tax Free Immediate Annuity Distributions
Another strategy to save money on long term care insurance is to fund annual long term care insurance premiums with an immediate annuity. In this simple strategy, a policy holder transfers a lump sum into an immediate annuity that is set up to make an annual payment to pay for long term care insurance premiums through a 1035 exchange. These immediate annuity distributions are not considered reportable income because they pay for long term care insurance premiums. Once set up, the policy holder never has to worry about paying their long term care insurance premiums since the annuity automatically pays it for them. Tax free immediate annuity distributions will help the policy holder save tens of thousands of dollars in income taxes over the life of their policy.
Save money on long term care insurance by paying for your policy with tax-deferred money in your health savings account.
Many employees now have access to a Health Savings Account (HSA) that allows them to pay for qualified medical expenses with pre-tax income as a part of a high deductible health insurance plan. Tax qualified long term care insurance premiums are considered qualified medical expenses and can be paid from an Health Savings Account.
NOTE: Many confuse Health Savings Accounts (HSAs) with Flexible Spending Accounts (FSA). Flexible Spending Accounts also allow employees to pay for eligible out-of-pocket health care expenses with pre-tax income. Unfortunately, long term care insurance premiums are not considered an eligible expense, therefore Flexible Spending Accounts (FSAs) may not be used to pay for long term care insurance.
Save money on long term care insurance with premium deductions on individual income tax returns.
Long Term Care Insurance Premium Tax Deductibility
You may be able to deduct part of the premium for a tax-qualified long term care insurance policy from your taxes. A portion of tax-qualified long term care insurance premiums are considered a medical expense. Individuals who itemize tax deductions can deduct medical expenses to the extent that they exceed 7.5% of the individual’s Adjusted Gross Income (AGI). The amount of the long term care insurance premium treated as a medical expense is limited to the eligible premium limites defined by the Internal Revenue Code 213(d) based on one’s age.n The long term care insurance premium that exceeds the IRS limits is not included as a medical expense.
Individual taxpayers can treat the long term care insurance premiums paid for themselves, their spouse or any tax dependents (such as parents) as a personal medical expense. The yearly maximum deductible amount for each individual depends on the insured’s attained age at the close of the taxable year. The IRS deductible maximums are indexed and increase each year for inflation.
Long Term Care Expense Deductibility
Nursing home care can be itemized on your 1040 Schedule A, but only medical costs in excess of 7 1/2% of your adjusted gross income may be tax deductible.
NOTE: To be eligible for long-term care premium individual tax deductions, an individual must have a tax qualified policy and itemize his/her expenses on a form 1040 Schedule A.
Federal Tax Treatment of Benefits Paid By A Long Term Care Insurance Policy
Benefits paid from a tax-qualified long term care insurance policy are generally excluded from income. These benefits are treated as reimbursement for medical expenses incurred regardless of whether the long term care insurance policy reimburses actual expenses or pays benefits on a daily or monthly basis. Benefits paid on a daily or monthly basis are excluded from income except for amounts paid that exceed the policy holder’s actual long term care expenses.
Save money on long term care insurance premiums with business tax savings.
Many companies now offer long term care insurance as another valuable employee benefit. Premiums paid for tax-qualified long term care insurance are given tax-favored treatment.
- C Corporation Long Term Care Insurance Tax Deductions
When a C-Corporation pays the premiums on long term care insurance for employees, their spouses, and qualified dependents, the company can generally deduct 100% of the premium paid as a reasonable business expense. Business owners are treated like any other employee when premiums are paid in relation to their capacity as an employee of the business. Employees don’t have to declare the premiums paid as income and long term care insurance benefits received will be tax free. - Shareholders
If a C-Corporation purchases a long term care insurance policy for a shareholder who is not otherwise an employee, no deduction is available to the C-Corporation and the premiums represent dividend income to the shareholder. - S-Corporation Long Term Care Insurance Tax Deductions
When an S-Corporation pays the premiums on behalf of owners of 2% or more of stock and employees, their spouses, and qualified dependents, the company can generally deduct 100% of the premium paid as a reasonable business expense. Owners of 2% or more of stock must declare employer-paid premiums paid for their long term care insurance as income, but they are then able to deduct eligible premiums on their individual tax returns. However there is no deduction allowed if the owner is eligible to participate in any other employer subsidized plan which includes coverage for long term care services including that of a spouse’semployer and other insurance. Employees don’t have to declare the premiums paid as income and long term care insurance benefits received will be tax free. - Sole Proprietor Long Term Care Insurance Tax Deductions
When a Sole Proprietor pays the premiums on behalf of employees, their spouses, and qualified dependents, the company can generally deduct 100% of the premium paid as a reasonable business expense. Sole Proprietors must declare employer-paid premiums paid for their long term care insurance as income, but they are then able to deduct eligible premiums on their individual tax returns. However there is no deduction allowed if the owner is eligible to participate in any other employer subsidized plan which includes coverage for long term care services including that of a spouse’s employer and other insurance. Employees don’t have to declare the premiums paid as income and long term care insurance benefits received will be tax free. - Partnership Long Term Care Insurance Tax Deductions
When a Partnership pays the premiums on behalf of partners for services rendered in a capacity as an employee, non-partner employees, their spouses, and qualified dependents, the Partnership can generally deduct 100% of the premium paid as a reasonable business expense. Partners must declare employer-paid premiums paid for their long term care insurance as partnership income, but they are then able to deduct eligible premiums on their individual tax returns. However there is no deduction allowed if the partner is eligible to participate in any other employer subsidized plan which includes coverage for long term care services including that of a spouse’s employer and other insurance. Employees don’t have to declare the premiums paid as income and long term care insurance benefits received will be tax free.
