RetirementGuard: Browni University: Tax Facts - To to your Voluntary Long-Term Care Insurance Plan

Tax Facts for Individuals

Premiums paid by an individual for qualified long term care insurance are treated as a medical expense for purposes of itemizing medical expenses.

The amount that can be used in calculating the expense deduction is limited to the lesser of actual premium paid, or "eligible long term care premium." defined as follows:

Attained Age before Close of Taxable Year	Allowable Deduction for tax year 2014	Allowable Deduction for tax year 2015
40 or Younger	$370	$380
41 through 50	$700	$710
51 through 60	$1,400	$1,430
61 through 70	$3,720	$3,800
71 and older	$4,660	$4,750

The amount of premium paid for the coverage of the individual, spouse and dependents may be deducted to the extent that the total medical expenses, including the eligible long term care premium, exceeds 10% of adjusted gross income (AGI). Benefits paid on a qualified long term care insurance policy to an individual are generally not taxable.

Note: Before making tax decisions about long-term care insurance it is essential that you consult with your attorney, accountant, or other tax professional, for advice regarding your own personal situation.

Tax Facts for the Sole Proprietor

Sole proprietors can deduct the full premium paid for LTC coverage they provide their employees. With respect to their own coverage, the sole proprietor can deduct 100% of the eligible long term care premium, which is age based. Long-term care insurance qualifies as accident and health insurance. "Eligible long term care premium" is defined as follows:

The amount that can be used in calculating the expense deduction is limited to the lesser of actual premium paid, or "eligible long term care premium." defined as follows:

Attained Age before Close of Taxable Year	Allowable Deduction for tax year 2014	Allowable Deduction for tax year 2015
40 or Younger	$370	$380
41 through 50	$700	$710
51 through 60	$1,400	$1,430
61 through 70	$3,720	$3,800
71 and older	$4,660	$4,750

There is no 10% of AGI threshold requirement.

A sole proprietor can deduct the full premium paid for LTC coverage by hiring his/her spouse as an employee and providing family coverage for the employee/spouse. The employer/spouse is then covered by the plan as a member of the employee's family. If the employee/spouse is a bona fide employee, the cost of the coverage is fully deductible by the employer/spouse and excludable from the employee/spouse's gross income.

Note: Before making tax decisions about long-term care insurance it is essential that you consult with your attorney, accountant, or other tax professional, for advice regarding your own personal situation.

Tax Facts for Partnerships

When a partnership pays for LTC coverage on its partners, it can deduct premiums that qualify as "guaranteed" payments under IRC Section 707(c). LTC premiums constitute guaranteed payments if they are paid for services rendered by the insureds in their capacity as partners, without regard to partnership income. Since partners are not employees, they cannot use IRC Section 106(a) to exclude from their gross income the LTC premiums paid by the partnership. Although partners must include the full amount of such premiums in their gross income, they can deduct a portion of the premiums paid. The "eligible" long-term care insurance premiums which are paid.

The amount that can be used in calculating the expense deduction is limited to the lesser of actual premium paid, or "eligible long term care premium." defined as follows:

Attained Age before Close of Taxable Year	Allowable Deduction for tax year 2014	Allowable Deduction for tax year 2015
40 or Younger	$370	$380
41 through 50	$700	$710
51 through 60	$1,400	$1,430
61 through 70	$3,720	$3,800
71 and older	$4,660	$4,750

The same rules that limit the deduction a sole proprietor can take for his or her long term care premiums also limit the premiums that a partner can deduct. Members in a limited liability company (LLC) taxed as a partnership, are subject to these same limitations.

If a spouse is a bona fide employee of a partnership or LLC, the same rules regarding deductibility and exclusion from gross income that are described in the section on Sole Proprietor apply.

Partnerships may generally deduct all premiums paid for employees, their spouses and dependents, retirees', and retirees' spouses.

Note: Before making tax decisions about long-term care insurance it is essential that you consult with your attorney, accountant, or other tax professional, for advice regarding your own personal situation.

Tax Facts for C Corporations

C-Corporations may generally deduct the entire premium paid for policies for employees, their spouses and dependents, retirees', and retirees' spouses, as a reasonable business expense. Long-term care insurance qualifies as an accident and health plan within the meaning of IRC Sections 105(b) and 106. The employer paid premiums are not considered as taxable income to those insureds.

Importantly, there is no requirement that coverage be provided on a non-discriminatory basis to all employees. The C-Corporation may, therefore, purchase a policy for certain key employees on a tax-deductible basis, and the key employee will not have to report this benefit as taxable income.

Note: Before making tax decisions about long-term care insurance it is essential that you consult with your attorney, accountant, or other tax professional, for advice regarding your own personal situation.

Tax Facts for S Corporations

For fringe benefit purposes, a 2-percent shareholder of an S corporation is treated like a partner in a partnership. Therefore, an S corporation can deduct the premiums it pays in consideration for services rendered by the insured shareholder, and the shareholder must include the full premium in his or her gross income. However, shareholders can deduct "eligible" premium.

The amount that can be used in calculating the expense deduction is limited to the lesser of actual premium paid, or "eligible long term care premium." defined as follows:

Attained Age before Close of Taxable Year	Allowable Deduction for tax year 2014	Allowable Deduction for tax year 2015
40 or Younger	$370	$380
41 through 50	$700	$710
51 through 60	$1,400	$1,430
61 through 70	$3,720	$3,800
71 and older	$4,660	$4,750

A 2-percent shareholder is defined in IRC Section 1372 as "...any person who owns (or is considered as owning within the meaning of Section 318) on any day during the taxable year of the S corporation more than 2 percent of the outstanding stock of such corporation or stock possessing more than 2 percent of the total combined voting power of all stock of such corporation." IRC Section 318 provides rules for the constructive ownership of stock (the attribution rules). Under these rules, an individual is deemed (i.e., considered) to own stock owned directly or indirectly by his parents, spouse, children and grandchildren.

The S Corporation can generally deduct all premiums paid for policies covering non shareholder employees, their spouses and dependents, retirees', and retirees' spouses.

Note: Before making tax decisions about long-term care insurance it is essential that you consult with your attorney, accountant, or other tax professional, for advice regarding your own personal situation.

Tax Facts for Employers and Employees

Employer Deduction - LTC Premiums

When an employer pays the premium for qualified long term care coverage for its employees, the employer should be able to deduct those premiums as an ordinary and necessary business expense to the same extent that it can deduct premiums paid for other accident and health insurance covering its employees (IRC Sec. 162). However, an employer cannot provide long term care coverage as part of a cafeteria plan (IRC Sec. 125(f)). An employer can discriminate by making contributions to a specific class (es) of employees.

Employee Income - LTC Premiums

Under IRC Section 106(a), an employee does not have to include in gross income the cost of any employer-provided coverage under an accident or health plan. Consequently, with one exception, premiums paid by an employer for an employee's qualified long term care insurance are not includible in the employee's gross income. No distinction is made to the amount of premium which is not included in gross income. However, if an employer provides long term care coverage through a flexible spending arrangement, the employee must include the cost of that coverage in gross income (IRC Sec. 106(c)). Accordingly, the employee's medical expense deduction is then limited to the lesser of actual premium paid or the eligible long term care premium, and the normal threshold of 10% of AGI applies.

Employee Income - LTC Benefits

Amounts received under a qualified long term care insurance contract are treated as reimbursements for expenses actually incurred for medical care (IRC Sec. 7702B(a)(2)). As a result, if an employer pays the premium for an employee's qualified long term care coverage, the employee will NOT be taxed on the long term care-benefits paid under the insurance -- those benefits are treated as a non-taxable reimbursement for medical care. The result is the same whether the insurance reimburses actual long term care expenses or pays a per diem amount toward long term care. However, if the insurance pays a per diem benefit that exceeds the per diem limit provided under IRC Section 7702B(d) ($260 in 2007), the excess is taxable income to the employee unless the employee's actual long term care expenses equal or exceed the per diem benefit paid.

Shareholder Employees

LTC premiums paid by a C corporation on behalf of any shareholder are treated as non-deductible dividends, unless the corporation can establish that it is providing coverage to the insured in his or her capacity as an employee. If a corporation cannot deduct LTC premiums -- because the premiums are treated as a dividend to a shareholder -- the insured must include the entire premium in gross income. Again, IRC Section 106(a) only allows employees to exclude from gross income the cost of employer-provided LTC coverage.

Note: Before making tax decisions about long-term care insurance it is essential that you consult with your attorney, accountant, or other tax professional, for advice regarding your own personal situation.

State Specific Tax Facts

If your state offers a full, 100% deduction for long-term care insurance premiums, and your state income tax rate is, for example, 7% then your taxes would be reduced by $280 if you paid long-term care insurance premiums of $4,000. If your state offers a tax credit of $100- then the state will "pay" the first $100 of your premium.

State	Tax Incentive	Description Tax Treatment
Alabama	Deduction	Individuals are allowed an itemized deduction for qualified long term care insurance contract to the extent that the amount does not exceed specified limitations. These amounts are indexed. Businesses, whether incorporated or not, may deduct LTC insurance as reasonable compensation expenses.
Alaska	n/a	No tax benefits presently
Arizona	n/a	No tax benefits presently
Arkansas	Deduction	A deduction is allowed to the limits provided in the federal Internal Revenue Code
California	Deduction	A deduction is allowed to the limits provided in the federal Internal Revenue Code
Colorado	Credit	A Credit is allowed for 25 percent of the premiums paid for long term care insurance during tax year for the individual and spouse. The Colorado credit is only applicable to thoise with federal taxable income of less than $50,000; to two individuals filing a joint return with a federal taxable income of less than $50,000 if claiming the credit for one policy; or less than $100,000 if claiming the credit for two policies.
Connecticut	n/a	No tax benefits presently
Delaware	n/a	No tax benefits presently
District of Columbia	Deduction	A deduction for long term care insurance premiums paid annually ius allowed from gross income provided that the deduction does no exceed $500 per year, per individual. It does not matter whether the individual files joiuntly and the LTC poilicy must meet District of Columbia's definitions.
Florida	n/a	No tax benefits presently
Georgia	n/a	No tax benefits presently
Hawaii	Deduction	Same as federal tax law, except subject to 7.5% of HI adjusted gross income, instead of federal adjusted gross income.
Idaho	Deduction	A deduction is allowed for premium paid by a taxpayer for LTCi which is for the benefit of the taxpayer, a dependent of the taxpayer or an employee of a taxpayer and the amount can be deducted from taxable income to the extent the premium is not otherwise deducted by taxpayer.
Illinois	n/a	No tax benefits presently
Indiana	Deduction	Deduction up to full cost of premium paid for qualified LTCi for taxpayer and taxpayer's spouse paid in the taxable year.
Iowa	Deduction	A deduction is allowed to the limits provided in the federal Internal Revenue Code
Kansas	Deduction	For tax years beginning in 2005,a subtraction from federal adjusted gross income for $500 in the tax year 2005, increasing each year by $100 until 2010. After 2010, it is a $1000 subtraction from the federal adjusted gross income for premium costs for qualified LTCi.
Kentucky	Deduction	Deduction from adjusted gross income allowed for any amount paid during the tax year for LTC premiums.
Lousiana	Credit	A credit against the individual income tax is allowed for amounts paid as premiums for eligible long term care insurance. The amount of the credit equals 10 percent of the total amount of premiums paid each year by each individual claiming the tax credit and the policy must meet the specific qualification requirements.
Maine	Deduction	The Superintendent of the State must certify the policy you purchase as a qualifying long term care policy. Then you are pemitted a deduction as long as the amount subtracted is reduced by the amount claimed as a deduction for federal income tax purposes. Sounds more complicated than it really is. Employers providing long term care benefits to employees may also qualify for a tax credit which follows a formula equal to the lowest of $5,000, 20 percent of the costs or $100 for each employee covered.
Maryland	Credit	Taxpayer is allowed a one-time credit against the state income tax in an amount equal to 100% of eligible LTCi premium paid. The credit may not exceed $500 for each insured, may not be claimed by more than one taxpayer with respect to the same individual and may not be claimed if the insured was covered by LTCi before July 1 2000. No carryover is allowed. For employers, a credit up to an amount equal to 5% of the costs incurred by the employer during the taxable year for providing LTCi as part of the benefit package. The credit may not exceed $5000 or $100 for each employee covered by LTCi under the benefit package.
Massachusetts	n/a	No tax benefits presently
Michigan	n/a	No tax benefits presently
Minnesota	Credit	A credit is allowed for LTCi premiums equal to the lesser of: (1) 25% of premiums paid to the extent not deducted in determining federal taxable income; or (2) $100 (which equals $200 for married couples who file joint tax returns.)
Mississippi	Credit	A credit equal to 25% of premium costs paid during the taxable year for a qualified policy for self, spouse, parent, parent-in-law, or dependent. The credit cannot exceed $500.
Missouri	Deduction	Taxpayers may deduct 100% of all non-reimbursed amounts paid for qualified LTCi premiums to the extent such amounts are not included in itemized deductions.
Montana	Deduction - Credit	Montana offers both a deduction for entire amount of qualified LTCi premiums covering taxpayer, taxpayer's parents, grandparents & dependents. A tax credit is now allowed for for premiums paid for long term care insurance coverage for a qualifying family member. The amount of the credit shall be based on the taxpayer's adjusted gross income and can not exceed $5,000 per qualifying family member in a taxable year. Or, $10,000 for two or more family members.
Nebraska	Deduction	Nebraska now permits a tax deduction for Long Term Care Savings Plan contributions of up to $2,000 per married filing jointly return or $1,000 for any otrher return to the extent that it is not deducted for federal income tax purposes.
Nevada	n/a	No tax benefits presently
New Hampshire	n/a	No tax benefits presently
New Jersey	Deduction	Deduction of LTC insurance premiums may be taken if they exceed 2% of adjusted gross income and cannot be reimbursed.
New Mexico	Credit - Deduction	New Mexico permits taxpayers who are age 65 and older and who are not a dependent of another taxpayer to claim a credit of $2,800 for medical care expenses which includes long term care insurance premiums paid for the filing taxpayer, spouse or dependents if expenses equal $28,000 or more within the particular taxable yeare (and so long as the expenses are nopt reimbursed). A deduction allows taxpayers an additional exemption of $3,000 for medical expenses if expenses (including the cost for LTC insurance) equal $28,000 or more within the taxable year and if expenses are not reimbursed or otherwise covered.
New York	Credit	Credit for 20% of premium paid for qualifying LTCi premiums. Taxpayer is permitted to carry over to future tax years any credit amount in excess of taxpayer�s tax liability for the year. Employers are eligible for a credit equal to 20% of the premiums paid during the tax year for the purchase of, or for continuing coverage under, a LTCi policy. The credit is not refundable and the credit may not reduce the tax to less than the minimum tax due
North Carolina	Credit	A credit is allowed for premiums paid on LTC insurance for taxpayer, taxpayer's spouse or dependent in an amount equal to 15% of the premium costs, up to $350 for each policy on which the credit is claimed as long as adj. gross income meets the following limitations: Married Filing Separately $50,000; Single $60,000; Head of Household $80,000; Married Filing Jointly or Qualifying Widower $100,000.
North Dakota	Credit	A credit is allowed for premiums paid on LTC insurance for taxpayer and or spouse up to $250 within any taxable year
Ohio	Deduction	Generally allows a deduction for the amount paid for qualified long term care insurance for the taxpayer, his spouse, and dependents.
Oklahoma	n/a	No tax benefits presently
Ohio	Deduction	Deduction of federally qualified LTCi premiums for taxpayer, taxpayer's spouse and dependents to the extent deduction is not allowed in computing federal adj.gross income.
Oregon	Credit	Credit equal to the lesser of 15% of premiums paid during the tax year or $500 for LTC insurance coverage for individual, dependent or parents. For employers, a credit of $500 is allowed for each employee covered by an employer-sponsored policy
Pennsylvania	n/a	No tax benefits presently
Puerto Rico	n/a	No tax benefits presently
Rhode Island	n/a	No tax benefits presently
South Carolina	n/a	No tax benefits presently
South Dakota	n/a	No tax benefits presently
Tennessee	n/a	No tax benefits presently
Texas	n/a	No tax benefits presently
Utah	n/a	No tax benefits presently
Vermont	n/a	No tax benefits presently
Virginia	Deduction	Virginia statutes permit a deduction from federal adjusted gross income for the amount paid in long term care insurance premiums provided the individual has not claimed a deduc tion for federal tax puposes or a credit under Virginia tax code 58.1-339.11. This code permits a credit against the individual's income taxes that shall not exceed 15 percent of the amount of long term care insurance premium paid during the taxable year. And, the credit can not be claimed to the extent that the individual has claimed a deduction for federal tax purposes. This one is worth having your CPA decide as a tax credit can be worth far more than a tax deduction.
Washington	n/a	No tax benefits presently
West Virginia	Deduction	Deduction for LTCi premiums covering taxpayer, taxpayer's spouse, parents and de
Wisconsin	Deduction	Deduction allowed for taxpayer & taxpayer's spouse for 100% of the amount paid for a LTCi policy to the extent the same deduction is not taken for federal income tax purposes.
Wyoming	n/a	No tax benefits presently
This information is not a substitute for expert tax advice. Please contact a tax professional for complete details