Long-term care insurance (LTCi) can serve as financial protection against the cost of future long-term care needs, and policyholders may also enjoy tax advantages by having this coverage. Since the costs of long-term care services can add up quickly, premium payments can also be significant. The good news is that at least some of the premium payments made to these policies may be tax deductible depending on the policyholder’s situation. Here, we’ll discuss the circumstances when long-term care insurance premiums are tax deductible and how much you may be able to claim as a tax deduction.
Is your long-term care insurance premium tax deductible?
The key to determining whether your monthly premium payments are tax deductible is learning whether your policy is tax-qualified (TQ) or non-tax qualified (NTQ). TQ policy premium payments may be tax deductible, whereas NTQ policies are not. If you have a policy, your insurance provider should be able to tell you which type of policy you have. Let’s take a closer look at what TQ and NTQ mean.
Tax-qualified long-term care insurance policies may be tax deductible
Tax-qualified LTCi policies must meet specific criteria set by the Internal Revenue Service (IRS) to qualify for tax advantages. One of the defining features of TQ policies is that they adhere to Health Insurance Portability and Accountability Act (HIPAA) standards, which require the policyholder to be chronically ill (unable to perform at least two activities of daily living for at least 90 days or requiring substantial supervision due to severe cognitive impairment) for benefits to be paid. Additionally, TQ policies must follow specific consumer protection guidelines outlined by the National Association of Insurance Commissioners (NAIC).
Non-tax-qualified long-term care insurance policies are not tax deductible
Non-tax-qualified LTCi policies do not adhere to the same IRS and HIPAA criteria as TQ policies, which means they do not offer the same tax benefits. These policies may provide coverage under a broader range of conditions not limited to the strict definition of being chronically ill. NTQ policies might include traditional long-term care insurance without HIPAA-defined triggers, or they might be part of more flexible insurance products that combine life insurance with long-term care benefits without meeting the TQ standards. The flexibility makes these policies appealing to some despite the lack of tax advantages.
It’s important to note that the distinction between TQ and NTQ policies is based on whether the policy complies with the specific criteria set by the IRS and HIPAA for tax deductibility. Contact your insurance provider if you’re unsure whether your policy is tax qualified or non-tax qualified.
The significance of tax qualification
With a tax-qualified long-term care insurance policy, the policyholder may be eligible to deduct part of their premiums as a medical expense, depending on their overall tax situation. The IRS recognizes premiums paid toward TQ policies as potentially deductible under the medical expenses category, provided they, along with other qualifying medical expenses, exceed a certain percentage of the taxpayer’s adjusted gross income (AGI).
However, the deductibility of these premiums is subject to several limitations. For instance, there is an age-dependent cap on the amount that can be deducted, and only amounts exceeding 7.5% of the policyholder’s adjusted gross income for the tax year can be considered. It is crucial for policyholders to understand not just whether their policy is tax qualified but also the nuances of how these deductions work.
Other factors influencing long-term care insurance tax deductibility
In addition to the considerations already discussed, several other factors can influence the tax deductibility of long-term care insurance premiums. Understanding these factors can help policyholders make informed decisions about their tax situations.
Itemizing deductions
One of the key considerations for deducting LTCi premiums is whether the taxpayer itemizes deductions or claims the standard deduction on their tax return. The premiums for a tax-qualified LTCi policy can be deducted only if the taxpayer forgoes the standard deduction in favor of itemizing deductions. The total of all itemized deductions, including medical expenses, must exceed the standard deduction for itemizing to be beneficial to the taxpayer.
Percentage of income
Even when itemizing, the total of all medical expenses, including LTCi premiums, must exceed 7.5% of the policyholder’s AGI. Only the amount that exceeds this threshold is tax deductible. This rule limits the tax benefits for those with higher incomes or lower overall medical expenses.
Age-related limits on deductions
The IRS sets age-based limits each year on the amount of long-term care insurance premiums that can be tax deductible. These limits account for the increasing cost of long-term care insurance as individuals age, providing greater tax relief for older policyholders.
For tax year 2024, the limits are as follows:
| Age by end of tax year | Limit |
| 40 and under | $470 |
| 41-50 | $880 |
| 51-60 | $1,760 |
| 61-70 | $4,710 |
| 71 and above | $5,880 |
Limitations based on income and filing status
The impact of a policyholder’s income and tax filing status on the deductibility of long-term care insurance premiums cannot be overstated. Higher-income individuals may find it more challenging to exceed the 7.5% AGI threshold for medical expense deductions, potentially reducing the tax benefits of their LTCi premiums. Additionally, the tax filing status, whether single, married filing jointly, or another status, can affect the standard deduction amount, which in turn influences the decision to itemize deductions. These factors must be carefully considered to understand the full tax implications of long-term care insurance premiums.
Health savings accounts
An additional layer of complexity and opportunity affects those with health savings accounts (HSAs). HSAs allow individuals to pay with pretax dollars for qualified medical expenses, including long-term care insurance premiums. This can provide a tax advantage regardless of whether one itemizes deductions. However, the amount of LTCi premiums one can pay from an HSA is subject to the same age-based limits set by the IRS for tax deductions. HSAs are a valuable tool for managing the cost of long-term care insurance, but it’s important to be aware of the limitations and rules that apply.
State-specific tax incentives
It’s also worth noting that some states offer their own tax incentives for long-term care insurance premiums. These incentives vary from state to state and may provide deductions or credits beyond what’s available at the federal level. Policyholders should research the specific tax benefits offered in their state to ensure they maximize their potential tax savings. The benefits can make a difference in the overall affordability of a long-term care insurance policy.
For example, the state of New York provides a notable state-specific incentive for long-term care insurance policyholders. New York allows residents to claim a tax credit for 20% of the premiums paid on qualifying long-term care insurance policies. This credit directly reduces the taxes the policyholder owes and is nonrefundable, meaning it can reduce the state tax liability to zero but not provide a refund beyond that. This incentive is particularly beneficial because it offers a dollar-for-dollar reduction in tax liability rather than a deduction from taxable income, making it more valuable for many taxpayers.
Whether long-term care insurance premiums are tax deductible is a complex topic, influenced by various factors, including the type of policy, whether the taxpayer itemizes deductions, the policyholder’s age, and their overall income and tax situation. Health savings accounts and state-specific tax incentives further complicate the topic, offering additional opportunities for savings under certain conditions. Given these complexities, it’s crucial for policyholders and prospective policyholders to consult with a tax professional to navigate the specifics of their individual situations. Understanding the tax implications of long-term care insurance premiums can help individuals make more informed decisions about their coverage and potentially ease the financial burden of planning for long-term care.
