Is Long-Term Care Insurance Tax Deductible? (Explained in Detail)

A long-term care insurance policy insurance is recommended for anyone as a pre-emptive measure to make sure they will have the ability to pay for long-term care needs. Having long-term care insurance can enable you to be protected if you ever get a chronic illness, disability, or are otherwise incapable of taking care of yourself and cannot perform activities of daily living on your own.

And since the costs of personal care services for help with activities of daily living are incredibly high, having an LTC insurance plan will provide the long-term care coverage to enable you to get the assistance you need.

However, it is not cheap. It can be an expensive insurance plan that tends to get exponentially more expensive as you get older due to the financial risk the insurer is accepting.

For many, that makes purchasing long-term care insurance a questionable proposal. The investment may not even be necessary, and that’s money that can be used for more immediate gratification.

However, there is a way to almost nullify some of the costs of long-term care insurance that makes obtaining a policy a no-brainer: Tax deductions.

We’re going to go over the tax deductibility of long-term care insurance, as well as the key details you need to know while deciding if it’s right for you.

Let’s get started.

What is Long-Term Care Insurance? A Brief Overview

Long-term care insurance is a type of insurance policy that covers things like medical costs, nursing home care, assisted living facilities, bed reservations in long-term care facilities, respite services, and various other forms of qualified long-term care services and medical care facilities.

Over an extended period of time, these skilled care services are typically financially crippling without insurance. For example, the average nursing home care costs a staggering $6692 per month ((1))

Having an individual long-term care policy can prevent you from paying these vast out-of-pocket expenses; preserving your savings and other finances and leaving you with an estate to pass down as your legacy to your children, or otherwise use during your retirement years.

However, long-term care insurance can be expensive. The average 65-year-old pays over $3700 per year for a fairly standard policy ((2)). But that could still prove to be much more cost effective than paying for long-term care services and medical treatment out of pocket.

Since this type of insurance can be a fairly substantial payment for most people, it makes it one of the insurance policies many people have trouble deciding whether or not to enroll in. However, there’s one way you can greatly offset these costs and make it a much easier decision. Tax deduction for long-term care insurance can be a big benefit.

What is a Tax Deduction? A Brief Introduction

A tax deduction is a form of rebate you can receive on your taxes. Certain items or expenses are covered by the tax deduction system, and if you purchase them or pay such expenses throughout the year, you can keep your financial records of each transaction and claim them on your income tax return.

Once claimed, the IRS will evaluate and approve your deductions, and part of the expense, or maybe all of it, may be deducted from your total tax liability.

Deductions on your taxable income can be made for business expenses, certain healthcare expenses, and various other expenses the IRS has outlined.

Is Long-Term Care Insurance Deductible?

With long-term care insurance being a big expense, you’re probably wondering if you can count it as a tax deduction and, in a way, get reimbursed for it? Well, you can. At least, you can get some of the costs reimbursed to effectively reduce its actual financial impact dramatically. This is because parts of long-term care insurance are considered tax-deductible.

Let’s take a deeper look into how these deductions work.

What Long-Term Care Costs are Covered?

You can claim your long-term care premiums as tax-deductible medical care expenses. This only covers your premiums. So, if you have other costs included with long-term care insurance such as late payment fees or other odd additional premiums to your usual payments, those will most likely not be counted towards a tax deduction.

Considering your premiums are the vast majority of your costs associated with long-term care insurance, this is a major reprieve that should be taken advantage of if applicable.

However, there are certain requirements you need in order to qualify for having your long-term care insurance premiums eligible for tax deductions.

How do Long-Term Care Insurance Premiums Qualify as Tax Deductible?

Medical expenses that exceed a percentage threshold of your annual adjusted gross income are covered by the IRS’s tax deduction guidelines. This includes various health insurance premiums such as long-term care insurance, Medicare premiums, and other medical insurance plan premiums.

However, you can’t just claim a tax deduction by virtue of having insurance. The cost of your premiums must exceed the set adjusted gross income percentage. If your expenses fall below that threshold, the premiums will not qualify as tax-deductible.

As of 2022, your annual premium payment must exceed 7.5% of your adjusted gross income ((3)). So, if you make $60,000 per year, you would need to pay an annual long-term care insurance premium of at least $4501 to exceed that threshold. As you can see, it becomes harder and harder to qualify as your income increases; as eventually, you simply won’t pay enough in premiums to qualify. At the same time, if you make a more average income of $40,000 per year, you only need to pay $3000 in annual long-term care insurance premiums to qualify.

If you take into account the average premium cost for people aged 65 and up that was highlighted earlier, this means the majority of middle-class and lower individuals will qualify to have their long-term care insurance counted towards their tax deduction in 2022. So that’s great news.

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Age Limits on Medical Expense Tax Deductions

Of course, like most things regarding taxes and the IRS, there are further conditions you must meet in regards to your deduction.

One of these things is that your age will determine how much you can claim as a deduction. For younger long-term care policy holders, this amount is much lower. Older taxpayers may claim a much higher amount, as indicated below.

40 and Under: $450
41 to 50: $850
51 to 60: $1690
61 to 70: $4510
71 and older: $5640

This is the total amount of medical deductions on your tax that you can claim. If your expenses exceed the amount associated with your age, the excess payments are not considered medical expenses, and they are not tax deductible.

Policy Requirements

Not only must you pay enough to exceed a percentage of your annual income and consider your age before getting a deduction, but you must also have an eligible long-term care insurance policy. There are certain reasons for long-term care insurance rejection.

In order to claim your premiums as medical expenses, you must have a policy that is recognized by the National Association of Insurance Commissioners. This is a group that sets guidelines and requirements for insurance policies and policy providers across the nation, and it has a few specific requirements a policy must meet before it’s considered a legitimate medical expense and covered as a tax deduction.

First, the policy carrier must offer you inflation protection and a non-forfeiture option. Note that these can be optional additions to a policy, and you can choose not to accept them without disqualifying your premiums from tax deductibility. Your insurer must simply offer those features in order for you to qualify. If you’re purchasing from a proper insurance company, this should not be an issue. Also note that these features will typically increase the cost of your long-term care premiums; which may increase the likelihood of you qualifying for a tax deduction if you are an above-average earner.

However, those aren’t the only specific requirements your policy will need to meet. The policy must also have “triggers”, or a list of certain events that allow your benefits to kick in, that cover cognitive impairment and activities of daily life –otherwise known as ADL triggers-.

The ADL trigger is the most complicated to understand. There are six items known as ADLs:

Eating
Toileting
Transferring
Bathing
Dressing
Continence

With an ADL trigger, you won’t be able to receive your benefits until you can no longer do at least two of the daily activities listed above.

The trigger will also make it so you won’t get benefits unless a medical professional determines you won’t be able to do those things for at least 90 days. In other words, it must prevent you from claiming benefits for short-term health setbacks.

However, there is an exclusion to this rule. If you have a policy that was purchased before 1997 that doesn’t meet the requirements listed above, it will be considered qualified regardless of what requirements it fails to meet. The only requirement for these policies is that they’re recognized by the National Association of Insurance Commissioners as legitimate.

Finally, some hybrid policies that combine things such as life insurance and long-term care insurance can produce some extra tax benefits, but these are highly specific to individual plans, and it’s best to speak to your preferred tax professional to see if any additional deductions can be made for your hybrid plan.

Benefits and Taxation

While this isn’t directly related to a tax deduction, it is important to know about your benefits and the tax system.

Payouts made from your insurance policy once benefits kick in are not considered taxable income. They’re exempt from taxation.

This means, if you get a $5000 payout from your benefits, it will not be taxed, and you can do what you wish with those funds in their entirety.

Unique 2022 Tax Considerations to Know

The IRS has a fairly standard way of approaching the limits and requirements it places, and these are adjusted each year depending on a large variety of factors. However, 2022, and the two years prior, have seen some major hurdles, and while the IRS has accounted for some of them, they have made some odd decisions when setting up the tax system for the 2022 season ((4)).

Namely, the nation has recently seen large inflation increases that have greatly changed how much the US dollar is worth. However, the IRS didn’t account for that inflation when it calculated the limits it’s placing on your tax deductions this year. This includes any long-term care insurance premium limits you were planning on having deducted. They calculated the average inflation rate they’ve used for decades with zero regards for the recent, large inflation increase affecting the country as a whole.

This means that the limits are set for a much better economy with lower inflation, and while you may be making more money that’s worth less than it used to be, you’ll still have to abide by the limit requirements from when the dollar was worth more. Essentially, you might not have experienced any meaningful financial growth thanks to inflation, but any wage increases accounting for inflation might still put you under the 7.5% threshold, and prices may have risen, but the limits on how much counts as a deductible medical expense have stayed the same.

Finally, independent contractors and self-employed individuals can now benefit from claiming their long-term care insurance premiums on their taxes. As long as a self-employed individual makes a net profit for the year, and their premiums exceed the standard 7.5% threshold, they qualify for premium-related tax deductions marked as medical expenses. However, note that all other requirements are still in effect.

Get a Professional to Ensure Your Policy and Premiums Count as Tax Deductions

As you can see, there are a lot of requirements you must meet in order to claim your long-term care insurance as a tax deduction. Those things can be difficult to determine on your own, and you may believe you qualify for a certain amount in deductions, when really your plan doesn’t meet a less-than-obvious requirement. That, or you may think you don’t qualify when you do; costing you quite a bit of money.

Contact Policy Solver to ensure you choose a policy that meets these requirements, and you may be able to get a portion of your long-term care insurance back via a tax deduction.

With the cost of long-term care insurance being so high, it’s important to mitigate that cost as much as possible. If you’re ready, then schedule an appointment today, and we’ll help you navigate the complex world of insurance policies.