By: Ronald A. Fatoullah, Esq. and Elizabeth Forspan, Esq.
{4:22 minutes to read} Many people wisely choose to purchase a long-term care insurance policy which will pay for all or some of the costs of long-term care services, such as care at home or in a skilled nursing facility. It is important to understand that the government provides certain incentives, in the form of tax deductions and credits, for those who purchased and continue to pay for such policies. There are tremendous added tax benefits that individuals with such policies must understand before "tax time" rolls around.
Qualified long-term care insurance premiums are tax deductible to the extent they, along with other unreimbursed medical expenses, exceed a specific minimum threshold of the taxpayer's Adjusted Gross Income (AGI). In 2016, for taxpayers who are 65 and older, premiums paid for these policies are deductible so long as they exceed 7.5% of the taxpayer's AGI. For those under the age of 65, that AGI threshold is 10%. Note that for 2017, the 10% threshold will apply to those 65 and older as well.
While premiums for qualified long-term care insurance are deductible, there is a maximum deduction that the Internal Revenue Service will allow. The maximum annual deduction will vary depending on the taxpayer's age. For 2017, taxpayers who are aged 40 and under prior to the close of the tax year may claim a maximum deduction of $410. That number jumps to $770 for those above the age of 40 but not older than 50. The maximum allowable deduction for those older than 50, but not older than 60 is $1,530, and it is $4,090 for those older than 60 but not older than 70. Finally, the highest maximum allowable deduction available is $5,110, which applies to those who are above the age of 70. These numbers have increased from the 2016 numbers (where the maximum deduction was $4,870 for those above the age of 70).
It is important to note that in order for the policy to be considered "qualified" and thus eligible for the premium deduction, the policy (or any such policies issued on or after January 1, 1997) must satisfy certain requirements and regulations established by the National Association of Insurance Commissioners. For example, the policy must offer an inflation option. Additionally, the policy must provide "triggers" for both activities of daily living AND cognitive impairment. A trigger is a specific condition that must be present in order for the policy to become activated. For policies purchased prior to 1997, such policies will be grandfathered in so long as they were approved by the commissioner of insurance in the state in which the policy was sold.
In addition to the federal allowable deductions described above, New York also provides a benefit for those paying long-term care insurance premiums. New York allows taxpayers who pay qualified long term care insurance premiums to claim a credit against their personal New York State income taxes. The credit is equal to 20% of the premiums paid by the taxpayer during the year. New York has its own definition of a qualified policy. (For more information on the New York credit, please see the instructions to Form IT-249).
While it is crucial for those with a long-term care policy to understand the allowable deductions and credits, they should not lose sight of the situations in which actual benefits received from such long-term care policies may be taxable. While beyond the scope of this article, taxpayers should know that benefits received from reimbursement policies (those that pay for the services the participant actually receives) are not includable in income. Benefits from per diem or indemnity long-term care policies are also not includable in income, except to the extent the recipient receives amounts in excess of what his/her actual long term care expenses were or $360 per day, whichever is greater.
Long-term care insurance is an important piece of the planning puzzle. While many people qualify for the insurance, there are others who for various reasons may not qualify and still others who may find that even with the aforementioned tax benefits, the premiums are too expensive. It is important to consult with a knowledgeable elder care professional to review the many options.
Ronald A. Fatoullah, Esq. is the principal of Ronald Fatoullah & Associates, a law firm that concentrates in elder law, estate planning, Medicaid planning, guardianships, estate administration, trusts, wills, and real estate. Elizabeth Forspan, Esq. is the managing attorney of the firm. The law firm can be reached at 718-261-1700, 516-466-4422, or toll-free at 1-877-ELDER-LAW or 1-877-ESTATES. Mr. Fatoullah is also a partner with Advice Period, a wealth management firm. The wealth management firm can be reached at 424-256-7273.
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