Tax Information for Individuals
The Tax Status of Long-Term Care Insurance
This section reviews tax information related to the Individual market segment. The information is intended to provide a general overview of certain federal tax laws pertaining to long-term care insurance. It is based on current interpretations of tax in effect as of the date of publication. Changes in the tax law may affect the information and any of the accompanying examples. Long-Term Care Quote and its representatives do not provide legal or tax advice, and nothing presented here should be considered as tax advice. Every prospective policyholder should obtain the advice of his or her own tax advisor.
General Rules of the Deduction of Premiums
For individual purchasers of a tax-qualified long-term care insurance policy, a portion of the premium qualifies as an eligible medical expense for tax purposes. Individuals can deduct their medical expenses to the extent that those expenses exceed 7.5 percent of their adjusted gross income. The portion of the premium that is eligible as a medical expense is based on the insured’s age and changes annually based on the cost of living index. The allowable amounts are:
Age Maximum Deduction for 2009 Maximum Deduction for 2010 < 40 $320 $330 41-50 $600 $620 51-60 $1190 $1230 61-70 $3180 $3290 70 > $3980 $4110
General Rules for the Taxability of Benefits and Refunds
If benefits paid under a qualified long-term care policy are received as a reimbursement of covered expenses (a common option with most plans), and those expenses were not claimed as a deduction in a prior year, the amounts received are not taxable.
If the benefits are paid on a per diem basis (as would be received under an "indemnity policy") without regard to the amount of qualified long-term care expenses paid by the policyholder, a limited portion of those benefits are excluded from taxable income. The excludable amount is adjusted annually based on the consumer price index. For 2009, that amount is $280 per day. For 2010, that amount is $290 per day. If the amount of per diem benefit received exceeds the excludable amount, the excess must be included in taxable income only if the benefit received exceeds the policyholder’s actual qualified long-term care expenses. This is important to note if you have or are considering an indemnity policy paying in excess of the per diem limit.
Rules for the Treatment of Premium Refunds
Any refund on a complete surrender or cancellation of a qualified long-term care insurance policy is included in gross income to the extent that any deduction or exclusion was taken for the premiums paid. It appears that refunds paid to an insured’s beneficiary on account of the death of the insured do not need to be included in taxable income.
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