Archive for November, 2017

Must You Be Self-Employed To Deduct LTC Insurance Premiums?

November 29, 2017

People ask me this question all the time.  The answer: Almost always “yes”…but could sometimes be “no”.

Warning: Depending upon what ultimately happens with the currently proposed federal tax bill, none of the following may remain relevant.  Or it all could.  I couldn’t wait for the House of Representatives & the Senate to decide.  Life goes on anyway.

Three general rules apply to the federal tax deductibility of LTC insurance premiums.  Rule 1. If you are NOT self-employed, you cannot deduct any policy premiums (oops!).  Rule 2. If you are self-employed, you can deduct some or all of your policy premiums, the amount depending upon your age.  Rule 3. An employer can deduct all long term care insurance policy premiums paid on behalf of employees…remember that an owner of a regular (C-corp) corporation is usually also an employee of that business.

The Internal Revenue Code (Section 7702B(b)) treats tax-qualified long term care insurance as health insurance.  Personal tax-payers add non-reimbursed medical expenses to the cost of all health insurance (including LTC insurance).  A medical care deduction is allowed to the extent this sum exceeds 10% of Adjusted Gross Income (AGI).  However, the deduction for LTC insurance is then limited to the lesser of actual premiums paid or the Eligible LTC Insurance Premium.

Eligible LTC Insurance Premium (2017)
Age 40 or less:           $410
Age 41-50:                 $770
Age 51-60:              $1,530
Age 61-70:              $4,090
Age 71 or better:   $5,110

Example 1:  Take someone age 55, with an Adjusted Gross Income of $100,000.  Health insurance annual costs were $3,000, non-reimbursed medical expenses were $2,000, & the annual LTC insurance premium was $1,600.  10% of AGI was $10,000 compared with only $6,600 for combined medical expenses.  Since our example person’s medical expenses were less than 10% of AGI, nothing, including LTC insurance premiums could be deducted for medical care.

Example 2:  But what if our taxpayer had very large medical treatment expenses that were not covered by health insurance?  Let’s say an organ transplant with an out-of-pocket (not reimbursed) cost of $40,000?  Now we have combined potentially deductible expenses of $3,000 + $2,000 + $1,600 + $40,000 = $46,600.  Thus her deductible medical care amount appears to be $36,600 ($46,600 – 10% of her $100,000 AGI).

Oops again!  Because she is age 55, the most LTC insurance premium she can deduct on her 2017 tax return is $1,530.  Her deductible medical expense amount is now $3,000 + $2,000 + $1,530 + $40,000 – $10,000 AGI = $36,530.  Were you able to follow this?  If not, please call me at 303-699-4172 & I will try to better explain how this works.

Most of the time someone with a middle class (or higher) income does not have medical care expenses (including cost of health insurances) that exceeds 10% of AGI.  Thus as in Example 1, there is no deduction for LTC insurance.

When else can someone who is not self-employed (and not married to a self-employed person) deduct at least some of the LTC insurance premium?  The only other situation I can think of is when either spouse has very large non-reimbursed medical expenses thus pushing the combined medical expense + health insurance above the 10% of AGI threshold.

Here is another situation when someone who is not self-employed can still benefit from long term care insurance taxation (Rule 3): If you have the good fortune of being employed by a company that provides long term care insurance as a benefit, both you & your employer win.

  1. You: No need to worry about deducting the premium as it is paid by your employer.  This is even better than a deduction.  You are not taxed on cost of the insurance & the policy benefits are received tax-free.
  2. Your employer: Can fully deduct the premiums paid on your behalf.

Finally, let’s look at the multitude of taxpayers who can deduct some or all of their long term care insurance premiums: People who are self-employed (Rule 2).  Go back to the Eligible Long Term Care Insurance Premium (2017) table above.  Self-employed individuals & their spouses can generally deduct their LTC insurance premiums up to the amount indicated for their age…same table for self-employed, but without regard to the 10% AGI threshold.

Example 3: The age 61 sole-proprietor of Joe’s Auto Repair has an Adjusted Gross Income of $100,000.  His health insurance cost was $3,000 per year, Joe had no unreimbursed medical expenses, & his annual LTC insurance premium was $3,500.  Using the Eligible Long Term Care Insurance Premium (2017) table, Joe can fully deduct his $3,500 LTC insurance premium…without first having to subtract 10% of his AGI.

Deductibility of long term care insurance seems hopelessly complicated…but it doesn’t have to be.  Just apply the three rules: 1. If you are not self-employed, then you probably cannot deduct.  2. If you are self-employed, then you can deduct some or all of your premium.   3. If your employer pays your premium, then you have nothing to deduct.  It would not be the Internal Revenue Code if it was not loaded with exceptions.  So remember that I do not give tax advice & do consult with your professional tax advisor before claiming (or passing on) any deductions.

Thank you,

Ray Smith, The Long Term Care Specialist

 

Notes:

  1. This article applies only to tax-qualified long term care policies.  Almost all traditional LTC insurance policies issued since 1/1/1997 are tax-qualified.
  2. This article does not apply to Hybrid, or asset-based policies that combine life insurance or annuities with long term care insurance.  Tax deductibility of these insurance products is a subject for another day.
  3. Dollar amounts in the Eligible LTC Insurance Premium table issued by the IRS are indexed.  This most often results in a small increase each year.  The “Age” in this table is the taxpayer’s actual age at the end (usually on 12/31) of the applicable tax year.
  4. Whenever this article speaks of someone being married, the assumption is that both are filing a joint tax return.
  5. The federal income tax deduction for medical care includes unreimbursed expenses of medical treatment (Doctors, hospitals, etc.) plus the cost of all health insurance policies.  Long term care insurance is specifically included.

Disclaimer: This eNewsletter and all links to other sources should not be construed as tax or legal advice because they are not either. Raymond Smith, The Long Term Care Specialist, does not give legal or tax advice. Consult your tax advisor or attorney for these matters.

© Raymond Smith, The Long Term Care Specialist, 2017