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Traditional long-term care insurance has had a bad rap these days. It seems like everyone knows premiums have increased through the roof. (FYI – they have stabilized.) Moreover, people don’t like the “use-it-or-lose-it” stigma associated with traditional long-term care insurance. We understand. As we have discussed, you will probably need some type of long-term care in your future. So, what will you do? If you are self-employed, you have significant tax advantages of purchasing traditional long-term care insurance. In this article, we discuss several long-term care insurance tax advantages for the self-employed.
What Is Traditional Long-Term Care Insurance?
First, a quick recap on what we mean when we say traditional long-term care insurance. Long-term care insurance will pay for the cost of home health, assisted living, and nursing home care. It effectively transfers the risk and financial responsibility from yourself, spouse, and personal savings to the insurance carrier.
All tax-qualified long-term care insurance policies come with benefit triggers. The triggers include the inability to perform 2 of 6 ADLs or cognitive impairment. (See the Q&A for more information on tax-qualified long-term care insurance plans.). ADLs, or activities of daily living, include transferring (walking), eating, toileting, bathing, dressing, and continence. If you can’t do 2 of these 6, you qualify for long-term care services.
You must select a monthly benefit amount along with a benefit period. Most long-term care needs are approximately 3 years.
The amount you are willing to spend depends on the combination of monthly benefit, benefit period, and any selected riders.
The Tax Advantages Of Long-Term Care Insurance
Everyone who purchases a traditional long-term care policy has some tax advantages. The average person can deduct a certain amount of long-term care insurance premium based on his or her age. The IRS limits this deduction amount, but as you age, the available deduction increases. (See below for the 2017 table).
The problem is that this deduction is deductible to the extent that the premiums, when combined with other health care costs, exceed 10% of your adjusted gross income. You then add any deduction to your Schedule A deductions. Here are two examples that make this situation clear.
John and Joan, both age 57, together spend $6,500 per year on their traditional long-term care insurance policy. Their AGI is $100,000: 10% of their AGI is $10,000. They have $500 in additional out of pocket health care costs. Because their total health care costs are less than 10% of their AGI, ($7,000 vs. $10,000) they can’t take a deduction for their long-term care insurance.
John and Joan, both age 57, together spend $6,500 per year on their traditional long-term care insurance policy. Their AGI is $50,000: 10% of their AGI is $5,000. They have $500 in additional out of pocket health care costs. Because their total health care costs are more than 10% of their AGI, ($7,000 vs. $5,000) they CAN take a deduction for their long-term care insurance costs. They are both eligible to deduct $1,530 (2017) or $3,060 in total off their taxes. However, because their total health care costs are only $2,000 above the 10% AGI limit, they can only deduct $2,000 of their $3,060 eligible to them.
Long-Term Care Insurance Tax Advantages For The Self-Employed
However, if you are self-employed, you have a significant advantage. You can deduct the premiums of traditional long-term care insurance at 100%, subject to the long-term care deduction maximums. Instead of 10% of AGI, you would take this deduction 100% on the health insurance line on your 1040 form.
Let’s look at John and Joan again.
John and Joan, both age 57, together spend $6,500 per year on their traditional long-term care insurance policy. Their AGI is $100,000. 10% of their AGI is $10,000. John is a self-employed plumber. They have $500 in additional out of pocket health care costs. Since John is self-employed, the 10% AGI limit doesn’t matter! They are both eligible to deduct $1,530 (the 2017 limit for people aged 50 – 59) or $3,060 in total off their taxes. (For the record, John and Joan can’t deduct the $500 additional out-of-pocket cost because it is less than the 10% AGI limit.)
That is better, isn’t it?
Did you catch something else in the above example? If you mention John’s wife, Joan, you are right. John can deduct Joan’s premiums as well. In fact, he can deduct his children’s premium if his children had a policy. Joan and his children do not have to work in the business with him. What a benefit!
The exception is if your spouse was eligible for a long-term care insurance plan through his or her employer. You can’t take a deduction in this case.
That is another tax advantage of long-term care insurance for the self-employed: you can deduct the premiums for your spouse and children even if they are not self-employed, either.
And, one last advantage. If you hire anyone, you don’t have to pay a long-term care insurance policy on him or her.
2017 Long-Term Care Insurance Tax Deduction Chart
The 2017 long-term care insurance tax deduction chart. The deductions usually increase each year.
What happens when spouses are in different age brackets? Easy. Let’s say you are 52 and your spouse is 49. Your total deduction is $2,300 ($1,530 + $770).
State Tax Deduction Considerations
Some states also offer tax deductions. Obviously, the reason is to incent you to purchase a qualified long-term care insurance policy. Keep in mind, your policy can be used anywhere. You don’t have to stay in the state that offers you a tax deduction.
Now, you know the long-term care insurance tax advantages for the self-employed. If you are self-employed, consider a traditional long-term care insurance policy. There is a good chance you and/or your spouse would need long-term care services in the future.
While many in the long-term care market disagree, we at My Family Life Insurance believe a traditional long-term care insurance policy is still viable to cover one’s potential long-term care needs. Need help? Contact us or fill out the information below. We can help determine if a traditional long-term care insurance policy is right for you, and if so, an affordable plan that meets your needs and budget.