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The rules for individual taxpayers allow premiums to be deducted up to a set level that increases annually. Self-employed people can also deduct their premiums, subject to certain conditions. Corporations have the most freedom in deducting long term care insurance premiums paid on behalf of employees.
Long Term Care Premiums and Individuals
For an individual taxpayer, if the amount paid in premiums for long term care coverage may be deducted at tax time if they amount to more than 7.5% of the taxpayer’s Adjusted Gross Income (AGI). A person who is paying premiums for themselves, their spouse or their parents may claim this expense for themselves.
The Internal Revenue Service (IRS) sets a maximum amount that can be deducted for this purpose on an annual basis. The maximum that can be deducted each year is adjusted for inflation. This amount is determined by the taxpayer’s age during the tax year. A person who is 40 years of age can deduct up to $330 for this purpose.
If the taxpayer is between the ages of 40-50, the limit increases to $620. For 50-60 year-old taxpayers, the limit is set at $1,230. A person who is between the ages of 60-70 may deduct up to $3,290 for their long term care premiums. Once a taxpayer reaches the age of 70, he or she has reached the maximum level of deductions for long term care insurance premiums. For 2010, the IRS has set this level at $4,110.
In a case where an individual is receiving benefits from a long term care insurance plan, this money is treated in the same way as a payout from a life insurance policy. It is not considered income and is not taxed in the recipient’s hands.
Long Term Care Premiums for Self Employed Individuals
The rules for treating premiums for long term care coverage are a bit different for self-employed individuals. In this situation, a full 100% of the premiums can be deducted for income tax purposes, up to the amounts listed above. Any amount paid that is higher than the allowable limit is not tax deductible. The 7.5% threshold for AGI is waived for those who work for themselves.
In a case where the self-employed person is married to an individual who is eligible to participate in a program where his or her employer subsidizes the cost of long term care premiums, the rules about deducting premiums are very specific. The self-employed person is not able to deduct the cost of his or her long term care premiums. This rule applies in cases where the employer pays the entire cost of the premiums or only covers a portion of this cost.
Long Term Care Premiums and Chapter C Corporations
Businesses which make the decision to buy a long term care insurance policy for any of its employees can deduct the full cost of the premium payments as a business deduction. Plans purchased on behalf of the employee’s spouse or dependent are also fully deductible by the corporation.
This type of deduction is not limited to the same amounts that an individual plan is. An employer is able to be selective when choosing which employees it will make this offer to, with the exception that offering to pay for this type of coverage cannot be based on stock ownership in the corporation.
The IRS would likely allow the corporation to take this deduction if it offered to pay for long term care coverage for all workers at a certain level of responsibility or as a benefit offered to everyone who has worked for the company for a minimum of a set number of years. It can be used as an executive benefit to attract and retain top talent for the company.
Since the premiums are fully deductible to the corporation, it may be wise to consider a plan offering an accelerated payment schedule so it can take advantage of the higher deductible levels. Good planning means the full cost of the plan can be paid before the company owner either reaches retirement age or sells the business.
Buying long term care insurance is an excellent decision, since it provides funding for services when the policyholder needs them. The premium payments can also provide valuable tax deductions for individuals, self-employed people and corporations.
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