Long-term care insurance has the same tax-favored status as regular health insurance.
In recent years, a number of employers have started to offer long-term care insurance as an optional employee benefit, and most insurance companies offer individual policies.
Insurance typically covers the cost of extended care in a nursing home, or in your own home if you become chronically ill or disabled and unable to care for yourself. The costs of such care over an extended period can be overwhelming and can rapidly wipe out your retirement savings.
Regular health insurance usually doesn’t cover prolonged nursing care or home assistance, and Medicare only provides coverage for a few months of nursing care after you have been hospitalized. Medicaid will cover such costs, but only if you’ve exhausted virtually all of your assets.
The tax breaks
Both the premiums you pay for qualified long-term care insurance and the benefits you receive enjoy favorable tax treatment.
The premiums you pay for long-term care insurance may be deductible as unreimbursed medical expenses if you itemize deductions. There is a limit on the amount of annual premiums you can deduct, depending on your age. Also, it’s important to remember that unreimbursed medical expenses are deductible only to the extent that the total exceeds 10% of your adjusted gross income in 2019 and beyond (7.5% in 2018). If you’re self-employed, you may deduct the same percentage of long-term care premiums that applies to regular health insurance premiums.
Benefits received under a qualified policy that pays only actual expenses are tax-free. In contrast, part of the benefits from policies that pay a set dollar amount (per diem) may be taxable.
The need for long-term care insurance
Long-term care insurance is not for everyone. You should consider it if you are not wealthy enough to pay for long-term care as you need it. You may also want to consider whether your family health history suggests you’ll die relatively early or live to old age.
If you decide to buy a policy, determine whether it qualifies for favorable tax treatment, and look carefully at factors such as eligibility for benefits, the types of care it covers, and whether it contains inflation protection.
What to look for in a policy
Some policies offer lifetime coverage while others are for a fixed term. If you choose the latter, look into restrictions on renewability.
In addition, most policies have a form of deductibility, called an “elimination period,” which is the number of days before coverage begins. The longer the elimination period, the lower the premium. Match the elimination period to what you can afford, remembering that Medicare may cover your costs for an initial period. And finally, these policies are not cheap, so take your time and do your homework before you commit.
Gilliland & Associates, PC is a full-service CPA firm specializing in tax planning for individuals and businesses in the Northern Virginia area. We are based in Falls Church, VA and also service clients in McLean and Tysons Corner, VA. Gilliland & Associates is known for our superior knowledge and aggressive interpretation and application of tax laws. We help you keep more of your earnings by finding you the lowest possible tax on your business or personal tax return. You can connect with us on Google+, LinkedIn, Facebook, and Twitter.