Owners of qualified long-term care policies are eligible for some important federal income tax breaks. Here are the details of two benefits policy holders get from Uncle Sam.
1. Benefit Payments Are Usually Federal Income Tax-Free
In general, benefit payments received under aqualified long-term care policy are free from federal income tax because they’re considered reimbursements for medical expenses under health insurance coverage. For 2015, this tax-free treatment automatically applies to benefits of up to $380 per day, or the equivalent for benefits paid on some other periodic basis (such as weekly or monthly). The $380 cap is adjusted annually for inflation. (For 2014, the cap was set at $370.)
Even if the policy pays benefits in excess of the cap, they are still federal-income-tax-free as long as they don’t exceed the insured person’s actual long-term care costs. However, benefits that exceed both the cap and the actual costs are generally taxable. (Internal Revenue Code Section 7702B(d)(1))
Note: If you receive long-term care insurance benefit payments during the year, you should expect to get a Form 1099-LTC from the IRS early in the following year. It reports the gross payments made to you. The taxable amount (if any) is calculated on IRS Form 8853, Archer MSAs and Long-Term Care Insurance Contracts.ignore the part about MSAs unless you have one.
If you have company-paid qualified long-term care insurance coverage through a job, the cost of the coverage is generally a tax-free fringe benefit to you for federal income tax purposes. However, if you pay the premiums with salary dollars via payroll withholding, the premiums are considered part of your taxable salary.
2. Potential Itemized Deductions For Premiums
Because a qualified long-term care policy is considered health insurance for federal income tax purposes, the premiums are treated as medical expenses on Schedule A. However, there are limits. You can only treat the age-based amounts listed below as medical expenses. Don’t forget to count premiums paid for coverage on your spouse, as well as premiums paid for other dependent family members (meaning you pay over half the cost of supporting the person and he or she doesn’t file a joint federal income tax return).
What Makes a Policy Qualified?
The difference between a qualified plan (which is tax deductible) and a non-qualified plan (which is non-deductible) lies mainly in what triggers the benefits. A tax-qualified plan must meet certain federal criteria, including a medical certification that the necessary care will last at least 90 days. Another requirement specifies the types of care needed during that time period.
If you’re expecting to get tax benefits from your long-term care plan, check with to make sure the plan you choose is qualified.