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Is it deductible? Navigating the Rules on Long-Term Care Insurance Premiums
By Smith Webster, CPA
When it comes to paying taxes, who doesn’t want to find every deduction and credit available? One often overlooked deduction opportunity is payments for long-term care insurance (LTCI) premiums. The tax rules surrounding this deduction are convoluted, and successfully navigating the maze largely depends on how LTCI coverage is purchased. The purchase methods vary along with the favorability of tax treatment.
LTCI policies owned by individuals face the highest bar for deductibility. For individuals, the premiums are includible as medical expenses. Under current tax rules, medical expenses may be deductible as itemized deductions if they exceed 7.5% of a taxpayer’s Adjusted Gross Income (AGI). The amount includible is also subject to age-based limitations that are adjusted annually for inflation. As you age, your deductible limit increases. The table below shows the age-based deductible limits for tax year 2024:
When coupled together, the AGI and age-based thresholds make it hard for individuals to deduct LTCI premiums unless they are older and have a year with low income. However, there are tax benefits to be found through alternatives like funding premiums with Health Savings Account dollars or purchasing a policy via a 1035 Exchange.
For policies purchased through a business, the deductibility is considerably more favorable. While the age-based limitation still applies, the 7.5% AGI limitation is no longer a factor. There are also several additional layers of nuance driven by how a business is structured. The rules for how to treat the deduction differ depending on whether the business is a sole proprietorship, partnership, S-Corp, or C-Corp. It is also worth noting that the rules for deductibility extend to policies purchased for employees as well as the owners of the business.
Given the complex nature of the LTCI tax rules, it is important to consult with a knowledgeable insurance provider that can help you determine the tax status of a LTCI policy.
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