NOTE: The following information about the tax issues pertaining to Tax Qualified Long Term Care Insurance (TQ LTCI) is meant to provide general guidelines only and is not all-inclusive. A more in-depth discussion of the tax guidelines surrounding TQ LTCI can be referenced in the Genworth Tax Guide. We do not give legal or tax advice and nothing herein should be construed as such. We highly recommend you seek the assistance of your own legal or accounting professional for advice pertaining to your particular situation.
Tax-Qualified vs. Non Tax-Qualified Policies (TQ vs. NTQ)
Almost all LTCI policies sold today are Tax-Qualified. The Health Insurance Portability and Accountability Act of 1999 (HIPAA) clarified that under Tax-Qualified policies, benefits are received tax free for actual LTCI expenses incurred. For policies that pay on an indemnity or cash basis, benefits received are tax free up to a daily/monthly amount declared by the government annually. In 2015 this amount is $330 per day ($9,900 for a 30 day month), which is well above the average costs of services.
Individuals who purchase Tax Qualified (TQ) Long Term Care Insurance (LTCI) policies for themselves, their spouse or their tax dependents, can include the premiums paid as an un-reimbursed medical expense if they itemize deductions. Un-reimbursed medical expenses are only deductible to the extent they exceed 7.5% of the taxpayer’s Adjusted Gross Income. The amount of TQ LTCI premium that can be included in the un-reimbursed medical expenses is subject to limits established by the government each year:
Age 2015 Eligible Premium Limit
40 and younger $380
71 and older $4,750
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A Sole Proprietor with a reportable net profit can deduct premiums paid for TQ LTCI policies for their self, their spouse and their tax dependents, following the rules for that applies to Individual taxpayers, above.
For TQ LTCI premiums paid by a Partnership for partners, their spousesand tax dependents, and their Employees:
Premiums Paid by
Partnership for: Effect on Partnership Effect on Individual
Partner, spouse & dep. Deductible Taxable Income
Employee Deductible Not Taxable
For TQ LTCI premiums paid by an S-Corporation for its owners, their spouses and tax dependents, and their Employees:
Premiums Paid by
S-Corporation for: Effect on S-Corporation Effect on Individual
Employee owning 2% Deductible Deductible
or less, spouse & dep.
Employee owning more Deductible Taxable Income
than 2%, spouse & dep.
For TQ LTCI premiums paid by a C-Corporation for its owners, their spouses and tax dependents, and their Employees:
Premiums Paid by
C-Corporation for: Effect on C-Corporation Effect on Individual
Employee, spouse & dep. Deductible Not Taxable
Employee Stockholder Deductible Not Taxable
Stockholder Not Deductible Taxable Dividend
Note: C-Corporations in particular, afford opportunities for establishing categories of employees under an adopted plan for purposes of determining benefits. Consult your tax and legal advisors when considering an employer sponsored LTCI plan.
LLCs and PCs
LLCs may be treated as a corporation, partnership or sole proprietorship for tax purposes, depending on which method was elected by the business. As a result, the tax implications of LTCI purchased by the LLC business would follow the rules of the tax method chosen.
PCs and PAs also have the ability to elect the tax method to be applied to their business, and can either chose to be treated as a C-Corporation or an S-Corporation. The tax implications of LTCI purchased by the PC business would also follow the rules of the tax method chosen.