As we all get older or watch our loved ones age, it becomes time to start thinking about long term insurance. Long term insurance (also known as long term care insurance) is an insurance program that helps to cover the costs and services of long term care, such as hiring a caregiver or staying in a nursing home. With long term insurance comes long term insurance tax, a system that can seem quite complicated to the ordinary person.
Finding a trusted insurance agent is a good way to navigate the tricky planning process for long term care, as well as the long term insurance tax. The committed team at the insurance company Policy Solver is a good example! Aside from finding an agent, educating yourself on the topic is the best thing you do. Keep reading to answer the question: what is long term insurance tax?
Long Term Insurance Tax
We have covered the fact that long term insurance assists with long term care – the services that become necessary as we get older and require assistance for things like bathing, transportation, dressing, and eating and drinking. But what exactly is the long term insurance tax we’ve mentioned in this article? If you are unsure, don’t worry! That is precisely what this section will clarify!
There are some basic premises that we can understand about long term insurance tax. The first is that the benefits of long term care insurance policies can be tax-free, as long as the plan itself is tax-qualified. What does this mean? Tax-free means that the benefits of your long term care insurance will not be counted as taxable income, so they will not be reduced at all. This is largely considered to be good news, since nobody looks forward to paying taxes or counting their taxable benefits.
A tax-qualified plan is one that offers federal income tax benefits to the planholder. Make sure to ask your insurance agent (or quickly find a reputable one) to ask and ensure that your long term care plan is tax-qualified in order to receive tax-free benefits. The second premise is that the premiums included on long term care policies can be tax-deductible, which we will cover later. For now, just try and remember that a premium is the amount of money you pay to your insurance company every month in order to continue your plan.
It’s great to have a definition for long term insurance tax, but let’s find some better ways to explain. So, let’s say that you have a tax-qualified long term care insurance plan. Most benefits paid for by a tax-qualified long term policy are not taxed as income. In our example, the benefits you receive as part of your long term insurance (such as paying for a caregiver or paying to stay at an adult day care) will not be taxable income. In short, they won’t factor into your overall taxes! There are also several reasons for long term care insurance rejection, so watch out.
This is especially important since your general income tends to decrease as you age, especially when you enter retirement. While income decreases, the costs of long term care and other medical expenses will rise. A tax-qualified plan will help you get as many benefits as possible without them being recorded as taxable income.
Here are two of the most common advantages that you will find with long term insurance tax.
- Saving you money. This is by far the best and most commonly cited advantage of having a tax-qualified long term insurance policy. When benefits are not regarded as taxable income, you save money that can be further used for your retirement and healthcare.
- You decide on your benefits ahead of time. Your benefits with a long term care insurance policy will be tax-free. When you create a long term care insurance plan, you decide which benefits you want to pay for. So, the benefits you uniquely decided on will end up being tax-free rather than general benefits of the plan.
Nobody wants to plan on getting older, but it is unavoidable. Care as you age becomes expensive, so these long term insurance tax advantages are sorely needed.
Now that we’ve covered some advantages to the tax, let’s be clear about potential disadvantages as well. With a view of both sides, you can make an educated decision on what is best for you.
- Long term benefits might not ever be used. With long term care insurance, you buy it on the assumption that it will be needed someday. Theoretically, that someday could never come. The benefits would remain unused, and so would the tax-free status that comes with them.
- Long term care is still quite expensive. Without insurance, long term care is nearly impossible to afford for a proper duration. And even with insurance, it is nothing to sneeze at! Some might feel that the tax-free benefits offered by long term insurance do not offset the overall cost.
Think carefully about what the long term insurance tax could mean for you. Better yet, talk it over with an insurance agent like the Policy Solver team! In the meantime, learn more about the other benefits of long term insurance tax and the answer to this question: what is long term insurance tax deductible?
Long Term Insurance Tax Deductible
The long term insurance tax deductible is a hidden benefit of long term care insurance. Tax deductible essentially means that it is able to be deducted or subtracted from your taxable income when it comes time to calculate how much you owe in taxes. Let’s look at some of the best ways to find tax deductibles when looking over your long term care insurance.
As we said, premiums are what you pay each month to keep a service ongoing. These premiums can stack up over the years, especially when it comes to finding long term care. With certain limitations, premiums for long term care can be tax deductible and thus subtracted from your overall dues. These limitations stipulate that a premium is tax deductible as long as it exceeds 7.5% of your adjusted gross income, or ADI. For self-employed people, premiums are automatically tax deductible as long as you make a net profit.
The next big deductible advantage comes in the form of your medical expenses. To get this advantage, it is essential that you itemize a list of all of your medical expenses. Any medical expenses that go over a certain percentage (or some other stipulation decided by the insurance company) can be written off as deductible. These can include, but are not limited to:
- Dental care
- Hearing and vision care
- Staying at a nursing home
- Procedures related to your health
- The costs of a caregiver
As you can imagine, having such expenses be tax deductible is a huge relief! Long term care insurance certainly helps with coverage, but watching the expenses pile up is a particularly nerve-wracking experience for so many people. Who wants to drain their finances on procedures and care? With long term insurance tax deductibles, you don’t need to!
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Long Term Insurance Tax Washington State
If you have heard of long term insurance tax before, chances are it was in relation to the state of Washington, located right here in the United States! Essentially, Washington created a mandatory payroll tax in order to fund the state’s newest long term care program. The idea is to use a 0.58% payroll tax on worker’s paychecks in order to pay for benefits that allow individuals to pay for long term health care. It is known as the WA Cares Fund, and is the first program like it in the nation.
As with anything, there are two sides to the debate about WA Cares. Those who are in favor of the plan say it is a way to assist an aging population and restrict the high premiums and cost of long term care found on the insurance market. Opponents of the act say that it is too inflexible in terms of payout, and that the plan is expensive. Since it does not officially begin until 2022, it is too early to really know how the plan will turn out.
If you work for a business in Washington and are not a federal employee, you most likely will be part of the fund. If needed, you can apply for exemption by demonstrating that you have another form of long term care insurance between the dates of October 1st of 2021 and December 22nd of 2022.
Where To Enter Long Term Care Insurance on Tax Return?
Of course, any conversation about long term care insurance tax would not be complete without mentioning tax returns! Tax returns are documents that report your income, annual expenses, and other essential financial information. They are filed annually, and allow you to also request refunds or schedule your tax payments. They are also the place to put deductions such as premiums or medical expenses related to long term care.
Typically, claiming a deduction means that you must itemize your deductions, and remember that medical expenses will only be tolerated if they exceed 7.5% of your overall income. The money gets better as you age; for people aged 70 and above, you will see the most deductibles to be itemized on your tax return.
For example, the premiums on tax-qualified long term insurance plans can be included up to a certain limit. To do so, file them as medical expenses on Form 1040, Schedule A, Itemized Deductions. You can also personally calculate the self-employed health insurance deduction. The limit on premiums increases as you age, going from $450 for those 40 and under to $5,460 for those aged 70 and over, at least in 2021.
Reaching out to both professional tax agents as well as insurance agents will help to clear up any lingering questions about your long term care insurance and tax returns! Don’t be afraid to reach out for help to ensure you are getting the best deal possible.
Who Is Long Term Care Insurance Tax For?
After all this, you may be left with a single question: who exactly is this for? To put it simply, long term care insurance tax is meant for the people who most need the benefits of long term insurance! As we have covered, you may not always receive the benefits of the long term care plan that you pay for. However, the likelihood of using those benefits will increase as you age. Those over the age of 65 and especially those over the age of 70 will benefit from long term care insurance tax. It’s important to think about long term care planning.
But age does not determine who qualifies; rather, it is who is most likely to qualify. Anyone who receives the benefits of their long term care or who pays high premiums will be in the prime audience of those who should take advantage of the long term care insurance tax! Discuss your premium rates with a trusted insurance agent to find out if you can qualify for the long term care insurance tax. You won’t be disappointed by the advantages it brings!
Where Can I Find Out More and Get Advice on Long Term Insurance Tax?
Today, you can find multiple insurance consultants on the internet. However, choosing the right advisor is another difficult task. Policy solver has knowledgeable, licensed agents, and is here to help you navigate through your long term insurance journey. We are a team of professional insurance policy brokers and we can save you time and money, while finding the right policy for your specific needs.
Our experienced advisors will ask you a few questions to understand your unique situation and will come up with a comprehensive analysis of different insurance plans so they will be able to recommend the best policy at the best price for you.
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“Long Term Care Insurance Pros and Cons.” Long Term Care Insurance Pros and Cons – Long Term Care Insurance, https://longtermcareinsurancepartner.com/long-term-care-insurance/long-term-care-insurance-pros-and-cons.
“The Tax Deductibility of Long-Term Care Insurance Premiums.” ElderLawAnswers, 11 June 2013, https://www.elderlawanswers.com/the-tax-deductibility-of-long-term-care-insurance-premiums-12320.
Zhou, Amanda. “Washington’s New Long-Term-Care Tax Begins in January. Here’s What to Know about the Program.” The Seattle Times, The Seattle Times Company, 11 Nov. 2021, https://www.seattletimes.com/seattle-news/health/washingtons-new-long-term-care-tax-deduction-begins-in-january-heres-what-to-know-about-the-program/.
“Important Changes This Year.” IRS Courseware – Link & Learn Taxes, https://apps.irs.gov/app/vita/content/00/00_25_005.jsp.