Effective January 1, 1997, the Health Insurance Portability and Accountability Act of 1996 provided tax incentives to both individuals and employers to purchase long-term care insurance. The law clarifies that benefit payments more than $300 per day ($9000 per month) in 2011 are tax-free as long as they do not exceed the cost of care. For individuals, a portion of the long-term care insurance premium based on your age is counted as a medical expense. Medical expenses in excess of 7 ½% of your adjusted gross income are tax deductible. Employers have better long-term care insurance tax incentives. Owners of C-Corporations can deduct 100% of the premium on themselves and their spouses, including limited pay plans that pay the premium up in 10 or 20 years.
Self-employed business owners can deduct an age-based amount of long-term care insurance premium in the same category as health insurance ($340 < age 41; $640 < age 51; $1,270 < age 61; $3,390 < age 71; $4,240 age 71+). Employers of any kind will receive a tax deduction for 100% of any portion of LTC insurance premium paid, and neither the contributions nor the premium will be taxable income to employees. Alternatively, the age-based amount of premium can be paid with pre-tax dollars from a health savings account. All of these provisions are available only with tax-qualified policies. (Policies issued prior to January 1, 1997 are “grandfathered” which means you get all of these tax advantages automatically and are considered tax-qualified policies.) Ask your insurance professional to show you the statement that the policy is intended to be tax-qualified on the written literature about the benefits that he or she gives you.
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