Please note that tax law and how it is interpreted can change quickly. Always check current tax regulations before you make any decision regarding long-term care insurance. A professional tax advisor can help you with your specific situation. This article is not intended as tax advice.

The U.S. federal government is encouraging residents to take personal responsibility for their future long-term care needs, and several states are following in suit by giving long-term care insurance beneficial tax treatment. For more information about state-level tax regulation, please read our article “LTCI & State Tax in the U.S.”

Federal tax benefits for individuals paying for LTCI

At the federal level, premiums for a tax-qualified LTCI count as a medical expense, within certain limits. For more detailed information, see Internal Revenue Code 213(d).

If you itemize tax deductions, medical expenses are deductible to the extent that they exceed current amount required to meet the individual’s Adjusted Gross Income (AGI).

The limit for how much of the LTCI premium that is seen as a medical expense depends on the age of the insured person (see below). The older the person, the higher the limit.

It is not just your own LTCI premiums that can be used as a the basis for a personal medical expense deduction; you are allowed to include LTCI premiums that you paid to insure a spouse or any other tax dependent (such as a parent) as well. The limit for the deductible depends on the age of the insured.

The limits are indexed and increases with inflation. Below, you will find limits for the year 2016. Always check limits for the applicable tax year.

The limits listed below are also the limits for how much of your LTCI premiums that can be paid using money from your Health Savings Account (HSA).

ELIGIBLE PREMIUM AMOUNT
2016: Federal tax deductible limits for LTCI premiums

Insured person’s age at close of tax year	Limit for deductible (Eligible Premium Amount)
40 years or younger	$390
41 years – 50 years	$730
51 years – 60 years	$1,460
61 years – 70 years	$3,900
71 years or older	$4,870

Example: Husband is 56 years old, wife is 48 years old. The eligible amount that the husband can include toward reached the currently required Adjusted Gross Income threshold is $1,460 since he is in the 51-60 years span. For the wife, the eligible amount is just $730 since she is in the 41-50 years span.

For some couples with a difference in age, a shared care LTCI policy offers better deductibility. This is a policy where the two insured individuals share one pool of benefits.

Taxability of benefits

In most cases, benefits received from a tax-qualified LTCI policy purchased by an individual is excluded from Adjusted Gross Income.

Benefits paid under an indemnity policy are taxed if they exceed the higher of:

• The cost of qualified long-term care
• $340 per day (the limit for 2016, will be adjusted up with inflation)

Rules for self-employed

If you are self-employed, you can deduct 100% of your LTCI premium costs for self, spouse and dependents, up to the same limits as for a non-self employed. For the year 2016, see the table “2016: Federal tax deductible limits for LTCI premiums” above. Any part of a LTCI premium that exceeds the limit is not deductible as a medical expense.

Meeting the 7.5% Adjusted Gross Income threshold is not required to take this deduction.

A self-employed individual is no allowed to deduct any LTCI premiums during any calendar month in which the individual or the spouse is eligible to participate in a subsidized LTCI plan, where the employer pays all or part of the LTCI premiums.

Rules for Partnership / Limited Liability Company (LLC) / Subchapter S Corporation

• Partners in a partnership are taxed as self-employed individuals.
• Members of a Limited Liability Company (LLC) that is taxed as a partnership are taxed as self-employed individuals.
• Shareholders/employees of a Subchapter S Corporation are taxed as self-employed individuals if they own more than 2% of the corporation.

When the partnership, LLC or Subchapter S Corporation pays the premium for LTCI, the partner, member or shareholder/employee includes the premium in their own Adjusted Gross Income, but is allowed to deduct up to 100% of the aged-based Eligable Premium as listed in the table above (“2016: Federal tax deductible limits for LTCI premiums”). Meeting the 7.5% Adjusted Gross Income threshold is not required for this deduction.

Important: When business is conducted as a partnership, and a partner has a spouse who is a true employee, the partner can deduct the full premium for the spouse’s LTCI policy. If the policy has a shared benefit rider, that would be included in the deductible premium amount.

Rules for other employers that pay for employee’s LTCI

An employer is allowed to make a 100% deduction of the premium paid by the employer for a tax-qualified LTCI policy where the insured in an employee, and/or the spouse or dependent of an employee. The premium counts as a business expense and is not limited. (Therefore, the table “2016: Federal tax deductible limits for LTCI premiums” above is not relevant here.)

The employer-paid premium is not included in the employee’s Adjusted Gross Income, not even if the premium exceeds the federal tax deductible limits for individuals.

Ten-Pay and Accelerated Premium Plans are popular, since they make it possible for the policy to be paid in full by the time the insured retires. This does not impact the deductibility of the premiums for the company and the premiums are not included in the employee’s Adjuster Gross Income either.

Premium partly paid by employer

If the LTCI premium is only partly paid by the employer, and the employee pays the other part, the employer can only deduct the part paid for by the employer as a business expense.

The employee can apply the part of the premium paid for by the employee towards the employee’s own medical expenses when doing taxes. The 7.5% AGI rule and the Eligible Premium Amount are both applicable.

Reimbursement from Health Savings Account (HSA)

A health savings account (HSA) is a tax-advantaged medical savings account available to taxpayers in the U.S. who are enrolled in a high-deductible health plan (HDHP). The funds contributed to an HSA are not subject to federal income tax at the time of deposit. If not spent, HSA funds roll over and accumulate year to year.

Premiums for a tax-qualified LTCI policy can be reimbursed through an HSA, tax-free up to the Eligible Premium Amount. This is true even if the HSA is offered through an employer-provided cafeteria plan.

Eligible premium amount for 2016

Insured person’s age at close of tax year	Eligible Premium Amount
40 years or younger	$390
41 years – 50 years	$730
51 years – 60 years	$1,460
61 years – 70 years	$3,900
71 years or older	$4,870

Reimbursement from Health Reimbursement Account (HRA)

In the United States, a Health Reimbursement Account is a type of employer-funded health benefit plan that reimburses the employee for certain out-of-pocket medical expenses. Reimbursing tax-qualified LTCI premiums is allowed, when done in accordance with IRC Sec. 213(d). LTCI premiums can not be paid on a pre-tax basis through an HRA, they must instead be paid by the employee using his or her own (taxed) money, before the employee can be reimbursed from the HRA.

A Health Reimbursement Account can create tax advantages for both employers and employees, but since the Affordable Care Act went into force, the Health Reimbursement Account must be integrated with a qualified employer-sponsored group health insurance to avoid excise tax penalties.

Cafeteria Plan

In the United States, a cafeteria plan is a type of employee benefit plan offered pursuant to Section 125 of the Internal Revenue Code. Qualified cafeteria plans are excluded from gross income.

• Tax-qualified LTCI coverage can not be purchased with pre-tax dollars under a cafeteria plan.
• A flexible spending account (FSA) set up through a cafeteria plan can not be used to reimburse tax-qualified LTCI premiums.

Federal gift tax exclusion for LTCI premiums

In addition to the $13,000 annual Gift Tax Exclusion, a donor can donate money to a donee to pay for the donee’s medical expenses, without triggering federal gift tax, if it is done in accordance with IRC Sec. 2503(e).

Tax-qualified LTCI premiums can count as medical expenses in this context, but the exclusion is limited to the age-based Eligible Premium Amount.

Eligible premium amount for 2016

Insured person’s age at close of tax year	Eligible Premium Amount
40 years or younger	$390
41 years – 50 years	$730
51 years – 60 years	$1,460
61 years – 70 years	$3,900
71 years or older	$4,870