Can You Deduct Long-Term Care Insurance Premiums?

Tax incentives play a prominent role in the products and services most of us purchase. Most taxpayers are more prone to investing in a health or wellness service that qualifies as a deductible medical expense. After all, tax write-offs are highly attractive. However, it’s tricky knowing what criteria you must meet to deduct a particular expense. In this post, we review long-term care insurance premiums and how to deduct them on your taxes. 

What Is Long-Term Care Insurance? 

Before diving into the ins and outs of tax deductions, let’s discuss the fundamentals of long-term care. Over 7.5 million Americans have long-term care insurance, with California, Texas, and New York topping the list of states with this coverage. But what is it, and who needs it? Furthermore, how do individuals and families pay for such a valuable service?

Understanding Long-Term Care 

As we age, many of us lose the ability to care for ourselves independently. Performing daily activities becomes more challenging, and our quality of life and overall well-being decline without help. In these cases, long-term caregivers respond to help loved ones live their best lives. 

The term “long-term care” covers an array of personal services, but the most familiar type is help with “activities of daily living” (ADLs), or otherwise known as personal care. Grooming, dressing, and eating are a few common examples of how others provide vital care for someone in need. 

Anyone could need long-term care; however, aging individuals are a prime candidate for this service. Several factors contribute to an individual’s probability of needing long-term care, including:

• Age
• Lifestyle
• Health (and family history)
• Gender
• Marital status

Furthermore, individuals with cognitive impairments, such as Alzheimer’s disease, often consider long-term care a comforting solution. But the need for long-term care services isn’t always permanent. In some cases, people only need this service while recovering from major surgery, an accident, or illness. Upon full recovery, many individuals regain their independence and no longer need long-term care. 

Long-Term Care Insurance

Given the typical duration of long-term care, it can become very pricey if paying for long-term care services out-of-pocket. Contrary to what some people believe, health insurance, Medicare, and Medicaid don’t usually provide coverage for long-term care services.

Some individuals depend on retirement funds, pensions, stock market profits, trusts, or even savings to pay for their long-term care. Others run out of money before running out of life, and it presents a challenging situation to navigate and creates a burden for loved ones.  

Fortunately, long-term care insurance offers solutions to these complicated issues. Long-term care insurance is an insurance policy that covers costs related to caregiving services to facilitate activities of daily living that an individual needs because of some physical or mental impairment. As mentioned above, this care might describe a host of services. This policy reimburses for long-term care provided at several places, such as:

• An individual’s home
• Assisted living facility
• Nursing home
• Adult daycare center

Before purchasing a long-term care insurance policy, understanding premiums, limits, and tax incentives is necessary. You may also be wondering if there is any way to offset the money you spend on long-term care insurance. The short answer is yes. 

Understanding Deducting Premiums and Increased Limits 

A long-term care insurance premium is the money you pay to an insurance carrier to keep your policy active. Many times, premiums are paid monthly, but some individuals choose to cover the annual premium in one fell swoop. 

Limit Changes for 2021

Fortunately, more of the premium you pay is eligible for a tax deduction in 2021. The Internal Revenue Service (IRS) recently increased the tax-deductibility limits on long-term care insurance premiums. Another plus is that the limits for the number of premiums you can deduct also increase as you age. 

Following is a chart of the 2021 long-term care deductible limits per individual:

How to Deduct Long-Term Care Insurance Premiums

Keep in mind; the more you know about long-term care and insurance plans that cover it, the better you can smartly navigate it. The first step is to talk with a seasoned insurance specialist about purchasing a long-term care policy. 

The following are criteria taxpayers must meet to deduct long-term care insurance premiums successfully:

1. Verify a “tax-qualified” status. Be sure to verify that your policy is “tax-qualified.” Without this particular stamp of approval, per se, you can’t benefit from the plan as you’d hoped.
   
   
2. Itemize deductions. On your Schedule A, you must itemize deductions to claim an out-of-pocket medical expense deduction, such as a long-term care insurance premium.
   
   
3. Deduct the correct amount. Per the IRS, an individual can only deduct the amount of medical expenses that are more than 7.5% of their adjusted gross income (AGI). Plus, only the exceeding amount is deductible. For example, if your AGI is $100,000, medical expenses (including your premium) must exceed $7,500 — and only the amount above $7,500 is deductible.
   
   
4. Consider your age. As mentioned above, the older you are the higher the deductible limit. Many self-employed individuals list premiums as a business expense, but your age is still a factor in determining a final figure. 

If you’re considering purchasing a long-term care insurance policy, the tax incentives are something to keep in mind. Only you and your family will know which policy is genuinely right for you. Plus, insurance policies and healthcare planning can be confusing. Talking with an experienced insurance professional is an excellent way to bring clarity to your unique situation. Not only can they offer advice, but they can also review your options and the potential tax benefits with you. 

It’s important to remember that everyone’s tax situation is different. Be sure to talk to a tax professional to determine how a long-term care tax deduction would work for you.

Need advice about insurance? Please contact us today, call (833) 414-5520 to speak to a licensed agent, or get a free quote.