10 Ways to Reduce Your Taxes with Long-Term Care Insurance

If you are a long-term care insurance policy holder, here are some tips to make sure you are getting all of your credits and deductions this tax season.

1. Owners of Health Savings Accounts can use money in the HSA to pay for some, if not all, of their LTCi premium on a pre-tax basis.
2. Owners of a Medicare Medical Savings Accounts can use money in the MSA to pay for most, if not all, of their LTCi premium on a pre-tax basis.
3. Retired public safety workers (e.g. firefighters, law enforcement, paramedics, etc…) can make tax-free transfers from their government-sponsored retirement accounts to directly pay their LTCi premiums.  (The transfers need to be done by the account trustee).
4. The self-employed: Someone who has self-employment income (e.g. home-based business, consulting work, etc…) can usually deduct some, if not all, of their LTCi premium under the “Self Employed Health Insurance Deduction” on the front of form 1040.  The LTCi premium for the spouse of the self-employed person can also be included under this deduction.  The self-employment does not have to be full-time.
5. Owners of closely held corporations (S-corps and C-corps) can pay for LTCi premiums and write it off as a business expense.  It does not have to be offered to all employees.  This is a great way to use business income to protect personal assets and income.  In some cases, a “refund of premium” rider can be added so that all the premiums are refunded to your heirs/estate.
6. Owners of non-qualified annuities can have interest earned in their annuity applied toward their long-term care insurance premium.  Interest withdrawn from an annuity is normally taxable.  This can now be done without paying tax on the interest this year. Owners of qualified annuities may withdraw funds and pay long term care insurance premiums  through a 1035 exchange, without paying tax on the withdrawal. (Everyone can take advantage of this method!)
7. Owners of cash value life insurance can have interest earned in the policy applied toward their long-term care insurance premium.  Interest withdrawn from a life insurance policy is normally taxable.  This can now be done without paying tax on the withdrawal this tax year.
8. Owners of old, no-longer-needed, cash value life insurance policies can do a tax-free transfer of the cash value directly to a single-pay long-term care insurance policy.   The gains in the life insurance policy go directly to the long-term care policy without having to pay tax on the gains in the life insurance policy.
9. State income tax credits and deductions: 29 states and the District of Columbia, now have state income tax credits or deductions for those who own long term care insurance.  Tax credits are available to residents of Colorado, Louisiana, Maryland, Minnesota, Mississippi, New York (20% credit), North Carolina, North Dakota, Oregon and Virginia.  These tax credits can significantly reduce your state income tax (dollar-for-dollar).
10. Lastly, if you itemize your federal income tax return, you can include much, if not all, of your long-term care insurance premium towards your medical expense deduction on Schedule A.

2012 Federal Long Term Care Insurance Tax Deductible Limits

The age-based limits are indexed annually (to nearest $10) to increases in the medical care cost category of the Consumer Price Index.

An individual taxpayer may deduct qualified long-term care insurance premiums subject to two limitations. First, any premiums greater than the above age-based limits are not deductible. Second, premiums under or equal to the above limits are deductible only to the extent that such premiums, together with any unreimbursed medical expenses the taxpayer has paid for himself or herself, his or her spouse, and dependents, exceed 7.5% of the taxpayer’s adjusted gross income.

The discussion of legal and tax considerations is an interpretation of current law and is not intended as legal or tax advice. Individuals should consult their contract, and legal and tax professionals.

***Be sure to consult with your financial advisor or tax professional pertaining to suitability for your situation***

For further questions please contact Jennifer at 631-262-7167 or visit her website www.LTCJennifer.com