Long Term Care Deductibility Levels
The premiums paid on qualified long term care insurance policies purchased in 2012 are subject to increased deductibility limits according to the Internal Revenue Service (IRS). The deductibility limitations are set under Internal Revenue Code Section 213(d)(10) which provides that a tax qualified insurance policy shall be considered or treated as an accident or health insurance policy under Section 7702B.
Tax qualified insurance premiums are considered a medical expense. For individuals who itemize, only medical expenses in excess of 7.5 percent of adjusted gross income are deductible.
For purposes of determining the extent to which such premiums are deductible, only eligible premiums paid during the taxable year for a qualified long term care insurance policy are deductible subject to the following limitation under Code Section 213(d)(10).
Maximum Deductions for qualified long term care insurance premiums under Code Section 213(d)(10)¹ are as follows:
Attained Age Before Close of Taxable Year 2012
40 or Less - $350 (up from $340 in 2011)
More Than 40 But No More Than 50 - $660 (up from $640 in 2011)
More Than 50 But No More Than 60 - $1,310 (up from $1,270 in 2011)
More Than 60 But No More Than 70 - $3,500 (up from $3,390 in 2011)
More Than 70 - $4,370 (up from $4,240 in 2011)
Amounts received under a qualified policy are treated as a reimbursement for expenses incurred for medical care as defined in Internal Revenue Code § 213(d). Expenses reimbursed from any public or private reimbursement policy are not includible in the recipient's gross income regardless of who makes the premium payment.² Tax qualified LTCI premiums can be reimbursed through a Health Savings Account (HSA) tax-free- up to the Eligible Premium (above).
With an Indemnity or per diem policy, however, only benefits up to a daily limitation are excludable from gross income. For calendar year 2012, the daily limitation for periodic payments received under a qualified LTCi policy is the greater of a prescribed dollar amount which is inflation-adjusted ($310 per day for 2012-up from $300 per day in 2011) or the actual costs incurred for qualified long term care services provided for the individual during such period, reduced by any reimbursements received for these services during such period regardless of who makes the premium payment.³
Example. Assume that George is chronically ill in 2011 and he receives 12 monthly payments on a per diem basis from a qualified LTCi policy. He is paid $4,500 per month ($54,000 total). George’s actual cost for qualified long-term care services is $165 per day ($60,225). The per diem limit is the greater of the prescribed dollar amount for 2011 multiplied by the number of days in the period ($300 x 365, or $109,500) or the actual cost incurred for the period ($60,225). Thus, George’s per diem limitation is $109,500. George’s per diem benefit of $54,000 was less than the $109,500 per diem limitation. Therefore, the entire $54,000 benefit is excludable from George’s gross income.
Note: If you purchased a tax qualified long term care insurance policy, notify your tax advisor about the transaction. You may be able to deduct some or all of your premium payments.
¹ I.R.C. § 213(d)(10).
² I.R.C. § 104(a)(3); I.R.C. §§ 105(a) and (b).
³ I.R.C. §§ 7702B(d)(4).
Return from Long Term Care to Financial Planning
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