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Long-Term Care Premium Deductibility Limits for 2010

IRS Issues Long-Term Care Premium Deductibility Limits for 2010

The amount you can deduct on your taxes as a result of buying long-term care insurance has been increased by the IRS for 2010. For the first time, the maximum deductible limit for an individual exceeds $4,000. Premiums for “qualified” policies (see explanation below) are tax deductible, provided that they, along with other unreimbursed medical expenses, exceed 7.5 percent of the insured’s adjusted gross income. These premiums — what the policyholder pays the insurance company to keep the policy in force — are deductible for the taxpayer, his or her spouse and other dependents. (If you are self-employed, the tax-deductibility rules are a little different: You can take the amount of the premium as a deduction as long as you made a net profit; your medical expenses do not have to exceed 7.5 percent of your income.)However, there is a limit on how large a premium can be deducted, depending on the age of the taxpayer at the end of the year. Following are the deductibility limits for 2010. Any premium amounts for the year above these limits are not considered to be a medical expense.

Attained age before the close of the taxable year Maximum deduction for year
40 or less $330
More than 40 but not more than 50 $620
More than 50 but not more than 60 $1,230
More than 60 but not more than 70 $3,290
More than 70 $4,110

What Is a “Qualified” Policy?

To be “qualified,” policies issued on or after January 1, 1997, must adhere to certain requirements, among them that the policy must offer the consumer the options of “inflation” and “nonforfeiture” protection, although the consumer can choose not to purchase these features. Policies purchased before January 1, 1997, will be grandfathered and treated as “qualified” as long as they have been approved by the insurance commissioner of the state in which they are sold. For more on the “qualified” definition, click here.

The Taxation of Benefits

Benefits from reimbursement policies, which pay for the actual services a beneficiary receives, are not included in income. Benefits from per diem or indemnity policies, which pay a predetermined amount each day, are not included in income except amounts that exceed the beneficiary’s total qualified long-term care expenses or $290 per day (for 2010).

When a business purchases a tax-qualified long-term care insurance policy on behalf of any of its employees, or their spouses and dependents, the corporation is entitled to take a 100 percent deduction as a business expense on the total premium paid. The deduction is not limited to the aged-based eligible premiums listed above.

For details on these and other long-term care insurance tax-advantaged rules, click here.

The Georgetown University Long-Term Care Financing Project has a two-page fact sheet, “Tax Code Treatment of Long-Term Care and Long-Term Care Insurance.” To download it in PDF format, go to: http://ltc.georgetown.edu/pdfs/taxcode.pdf