Long term care (LTC) has been a growing concern over the years with life expectancies and medical advancements increasing the likelihood of a long term care need. Additionally, the cost of this care has been rapidly increasing. Many people may find the need for long term care insurance (LTCI), which makes it even more important to understand the various strategies and advantages available when paying for LTCI. One important benefit to LTCI beyond the base coverage is that long term care insurance can provide additional tax incentives for individuals and business owners.
Long term care insurance premiums can be tax deductible, making coverage even more attractive. An individual can include LTCI premiums as an itemized medical expense. This however means that an individual must be itemizing their deductions instead of taking the standard deduction; and secondly, an individual must have medical expenses above the current IRS AGI (Adjusted Gross Income) limit (10% of AGI if under 65; 7.5% of AGI if 65 or older). This medical expense figure can include the costs of LTCI premiums, but again, this amount is limited. The IRS has set an age-based cap on how much LTCI premiums an individual can deduct. The 2016 limits are summarized in the table below:
|Age of Insured||Annual LTCI Premium Deduction Limit|
While LTCI deductibility for individuals can be fairly limited, a business owner can take advantage of tax deductions for LTCI that an individual would not be able to (see table below). Firstly, a business owner is not subject to the AGI limit for LTCI premiums paid on their own coverage. These premiums are considered business expenses, so they avoid these limits. They can however still be limited to the age-based cap, depending on the business structure. The real advantage for business owners is that they can provide coverage for other non-owning employees without limits to AGI or an age-based cap. These expenses are considered business expenses and can be fully deductible. This deductibility could also be used on LTCI for the spouses and dependents of employees. Additionally, if the business is structured as a C-Corp, the business owners could provide coverage on themselves with no limit on AGI or the age-based cap. Finally, a business owner can be discriminatory in who this LTCI benefit is offered to by “class” of employee (e.g. officers, tenure, key employees, etc.). Clearly there are many more opportunities for a business to deduct the costs of LTCI than for an individual.
Business owners however have some nice opportunities to receive additional deductions all while providing a nice benefit to their employees. Take for example a family business that has a spouse as an employee. The owner could pay for his/her spouse’s LTCI and fully deduct the cost of coverage. If the owner utilizes a “10 pay” LTCI policy (pay higher premiums up front for only 10 years), the owner could fully deduct the costs of LTCI for his/her spouse over 10 years, while working. This is preferred over a lifetime of premiums as the premiums in retirement may not be deductible, given the limited deductibility for an individual. Strategies like this can be great opportunities for a business’ and a family’s financial plan. If you are interested in hearing more about LTC coverage and the potential tax deductibility for you, please get in touch with your trusted advisors at D3 Financial Counselors.
Summary of Tax Deductibility of LTCI Premiums for Individual and Business Owners
|Must Itemize Deduction on Personal Return||Deduction Limited by AGI||Deduction Limited by Age Based Cap||Fully Deductible as Business Expense|
|Individual Paying Premiums||Y||Y||Y||N/A|
|Employer Paying Premiums for Self (Including Self Employed)||N||N||Y||N – Limited by Age Based Cap|
|Employer Paying Premiums for Employee||N/A||N||N||Y|
|C Corp Paying Premiums for Employee or Self||N/A||N||N||Y|
* Deductibility of LTCI premiums are subject to other restrictions relating to the “tax qualified” status of the policy. These restrictions consist of how much benefit is provided, to whom and how the premiums are paid. Additional restrictions should be considered in who qualifies as an owner or employee, given the business structure. Please consult with your D3 advisor or other trusted tax/financial advisor for further details.
–Brett Spencer MS, CFP®, CEPA