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Qualified Long-Term Care Policies Receive Favorable Tax Treatment
Congress has clarified the tax treatment of LTC insurance and, for policyowners who itemize, allows a limited tax deduction for premiums. A tax-qualified LTCI policy offers favorable tax treatment for premiums paid, out-of-pocket expenses, and benefit payments. A non-tax-qualified policy does not provide for the same favorable tax treatment—its premiums do not qualify for a tax deduction. (Whether nonqualified policy benefits will be deemed as taxable income is uncertain, because the IRS has not yet ruled on this issue.) Taxation of Qualified Premiums and Out-of-Pocket Expenses
Premiums paid for qualified LTCI policies and out-of-pocket expenses for long-term care are tax-deductible as medical expenses to the extent that the taxpayer’s total (unreimbursed) qualified medical expenses exceed 7.5 percent of his or her annual adjusted gross income (AGI). For example, if Hal’s adjusted gross income this year was $50,000, and he incurred $7,000 in qualifying medical expenses, he would be allowed to deduct up to $3,250 of those costs from his taxes:
Adjusted gross income $50,000
7.5 percent of AGI threshold $3,750
Qualifying medical expenses $7,000
Excess of medical expenses over threshold ($7,000 – $3,750) $3,250
However, the deductibility of qualified LTCI premiums is limited by the age of the taxpayer (as of the end of the year), and these limits are adjusted annually for inflation. The following chart shows the amount of LTCI premiums that could have been included as an allowable deductible medical expense in 2009:
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