Beat the tax man with long-term care insurance

You may not be able to avoid taxes altogether, but wouldn’t it be great if there were a way to enhance your lifetime financial security that was also tax-advantaged?

There is. Long-term care (LTC) planning using long-term care insurance offers some unique tax advantages.

Premium deductibility

Most self-employed business owners, partners and shareholders of corporate entities benefit from being able to totally or partially deduct their long-term care insurance premiums. In many cases, the premium for a spouse—or other tax dependent—may also be deducted.

The deduction for individuals isn’t available for most healthy people.

It becomes available if the taxpayer has unreimbursed medical expenses—including Tax-qualified Eligible LTC insurance premium—in excess of 10 percent of their adjusted gross income.

If that threshold is met, the excess is deductible.

The maximum eligible LTC insurance premium is published each year, and is a function of the insureds’ age during the tax year.

HSAs, HRAs, MSAs

LTC insurance premiums are an acceptable tax-free health-care expense from an HSA (Health Savings Account), up to the age-based eligible premium limits. The same is true for HRAs (Health Reimburse­ment Accounts or Arrange­ments). LTC insurance premiums are also an acceptable expenditure for MSAs (Archer Medical Savings Accounts).

Taxation of benefits

Here’s where long-term care insurance especially shines. We understand that—once someone becomes eligible for benefits—the amount they paid in premiums looks tiny compared to the benefits now deployable to pay for care.

But consider this: the benefits paid by long-term care insurance are almost always tax-free (yes, even if a deduction was taken for the premiums).

The exception to the tax-free status is an unusual one.

With a “per diem” policy (sometimes called a “cash” policy), if the amount of benefit paid by the insurer exceeds both the cost of qualified care services, and the daily threshold of $360 (2017 number), the excess benefit is subject to tax.

Most policies are not per diem, and so the benefit is tax-free.

Compare the tax-free funding source of long-term care to the options of someone who is uninsured.

Some­times, to fund their care, they choose to liquidate investment accounts, often incurring taxes and/or penalties.

That’s an especially expensive way to pay for care.

Taxes may be inevitable, but isn’t it nice to know that long-term care insurance allows us a way to kick the tax man (or woman) in the shin while taking care of our financial security?