Uncle Sam Can Help You Pay For Long-Term Care Insurance – Forbes

Uncle Sam Can Help You Pay For Long-Term Care Insurance – Forbes

Can a tax deduction help you afford long-term care insurance? If you’re buying it as an individual, maybe. If you’re self-employed and buying it through your business, absolutely. “It’s kind of a hidden secret,” says Lisa McAree, an insurance broker in Braintree, Mass. “Accountants will say you ought to contribute to a 401(k) retirement plan, or buy an SUV [to snag a tax break] but they don’t often bring up the fact that you can buy long-term care insurance through your business and get a tax deduction,” she adds.

McAree just signed up Kathleen Hagan, a single boomer who is a medical technology consultant in Watertown, Mass., with a long-term care policy from Prudential. The premium runs $3,204 a year, and it’s 100% deductible as a business expense on her federal income tax return. Basically, that’s like getting a 30% discount (or more, depending on your tax bracket). Plus, the benefits, if you eventually need them, are tax-free. Massachusetts doesn’t offer a tax break but many states do. Manulife’s John Hancock has a list of state incentives in its Long-Term Insurance 2011 Federal and State Tax Guide.

The federal tax break didn’t drive Hagan’s decision to buy. She had it on her to-do list. But the tax savings enabled her to get a policy with better coverage, she says. “It’s like saving for retirement and getting a will,” Hagan says. “It’s one of those things you need to do. I was a Girl Scout!”

Not everyone can get a tax break for long-term care premiums. If you’re buying a policy as an individual (not through your business), long-term care premiums are deductible as medical expense deductions, and those are only allowed to the extent they exceed 7.5% of your adjusted gross income. So for older folks with high medical expenses and relatively low incomes, the long-term care premium tax deduction is more likely to come into play than for middle-aged folks. (Another wrinkle: under ObamaCare, starting Jan. 1, 2013, the 7.5% floor goes up to 10% unless the taxpayer or his or her spouse is 65 or older).

There’s a second hurdle: an age-related premium limit on how much is potentially deductible (you deduct the lesser of the actual premium paid or the age-related premium). In 2011, if you’re 41 to 50, it’s $640 a year; if you’re 51 to 60 it’s $1,270; if you’re 61-70 it’s $3,390; and if you’re 71 and older, it’s $4,240.

Here’s the deal for self-employed folks with business income that passes through onto their personal returns. They don’t face the 7.5% AGI limit. Instead, they can deduct 100% of the premiums paid for themselves (and spouse) as a business expense, just like health insurance. These folks are still subject to the age-related premium limits, but that doesn’t necessarily limit your deduction—it didn’t in Hagan’s case.

Hagan’s long-term care purchase topped off a health and wellness makeover she started a few years ago. She tap dances, rows and cross-country skis. Her hope is that if she ever needs to borrow on her policy that she can have healthcare and assisted living services in her first floor condo in a charming old Victorian house. “I hope it’s the biggest waste of money I ever spent,” she says.

Ashlea Ebeling, Forbes Staff

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