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Tax Reduction Opportunities
The Federal Government passed the Health Insurance Portability and Accountability Act of 1996 (HIPAA). This act designated two types of
long-term care insurance policies. Tax Qualified policies may be eligible for tax deductions and must adhere to standards set forth by HIPAA. Non Tax Qualified policies are not eligible for tax
deductions and do not have to adhere to the standards set forth by HIPAA. As a result, the tax deductions that are listed in this section only apply to Tax-Qualified policies.
Here are some tax incentives for Tax-Qualified policies:
Individual
Premium payments to purchase qualified long-term care insurance by an individual - for yourself, your spouse, and your tax dependents (e. g.
your children or dependent parents) are now included as a personal medical expenses if you itemize your taxes [IRC Sec. 213(a)]. Medical expenses in excess of 7 ½% of your adjusted gross income are
tax deductible. This means that a portion of your long-term care insurance premium will help you reach the 7 ½% and may even help you to exceed that threshold to receive a tax deduction. Below is a
table of the eligible long term care premiums qualifying as medical expenses for the 2004 tax year. This is often referred to as the eligible long-term care premium. These increase each year based on
the Medical Consumer Price Index.
Self-employed
Qualified long-term care insurance premiums may also be treated like health insurance for the self-employed tax deduction. Self-employed
individuals may deduct 100% of the eligible long-term care premium shown above. Considering that payroll, state and federal income taxes can total more than 50% of income, someone who is
self-employed may utilize LTCi as an employee benefit and effectively cut the cost of LTC insurance by half! The definition of self-employed includes sole proprietorships, partnerships,
"greater than 2% shareholders" of S-corporations, or Limited Liability Corporations.
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Example: John, age 61, is self-employed as a consultant. His
long-term care insurance premium is $2,000 per year. Based on the Eligible Long Term Care premiums chart listed above, he is eligible to deduct 100% of up to $2,600.
Therefore, he can deduct the entire $2,000. If John chooses to direct this $2000 to his personal income, he may increase his payroll and income taxes by $1000. Using
LTCi as an employee benefit rather than to pay with after-tax money effectively reduces the "real" cost of insurance by around 50% depending on tax rates.
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C-Corporations
The government's incentives for C-Corps to use LTCi as an employee benefit are
unprecedented. First, businesses can choose which employees receive this benefit. Usually, fringe benefits have "non-discrimination" constraints that prevent
management from offering benefits to select individuals. Not only can LTCi be offered selectively, it can even be offered for spouses of select employees. To
minimize the cost of an LTCi program, this benefit can be limited to cover only the owner and spouse or, if desired, key staff and their spouses as well.
It is very rare to be able to protect your future with attractive tax results both for
premiums and benefits. Premium payments are fully (100%) deductible as a reasonable and necessary business expense- similar to traditional health and
accident insurance premiums [IRC Sec. 213(d)1]. This can apply to the owners, their spouses and dependents, and all employees. Employer-paid long-term care
insurance is excludable from the employee's gross income and the benefits received are tax-free.
Partnerships, S-Corporations and
Limited Liability Corporations (LLC)
Premium payments purchased for a partner or owner (2%+ shareholder) are subject to the same rules mentioned above for self-employed.
Premium payments for non-partner/non-owner or less than 2% shareholder-employee
are 100% deductible as a reasonable and necessary business expense -- similar to traditional health and accident insurance premiums.
Employer-paid long-term care insurance is excludable from the employee's gross income and the benefits received are tax-free.
Contact Advanced Planning Solutions for more assistance.
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