When the Health Insurance and Accountability Act (HIPAA) was signed into a law, it has created improvements on health insurance, and the most significant adjustment made was the tax deduction for long term care insurance policies. The HIPAA added the Internal Revenue Code (IRC) Section 7702B that mandates all long term care insurance contracts to be treated as tax deduction under certain rules and limits.
Recently, the Internal Revenue Service (IRS) announced the increased long term care insurance tax deduction for 2011. Jesse Slome, executive director of the American Association for Long Term Care Insurance (AATCI), announced the increase that will benefit more small business owners.
The deductions for qualified long term care premiums for the year 2011 under Section 213(d)(10) are the following:
40 or less – $340
More than 40 but not more than 50 – $640
More than 50 but not more than 60 – $1,270
More than 60 but not more than 70 – $3,390
More than 70 – $4,240
Source: IRS Revenue Procedure 2010-40
What Is a Tax-Qualified Long Term care Policy?
LTCi policies are considered tax-qualified if they meet certain provisions as prescribed by law. There are few requirements that will tell if your policy is tax-qualified or not:
– The policy should be guaranteed renewable
– The disability should drag long for the benefits to be paid
– A licensed health care practitioner should state if the individual is “chronically ill.” This should be done within 12 months
– There must be either or both of the two events that exist before a certification is given. First is the inability to perform Activities of Daily Living (ADLs) for at least 90 days. The policy must have at least five ADLs. Second is the need for supervision due to severe cognitive impairment
– Non-forfeiture and inflation protection must be offered by the insurer, but are not required in the policy
– Benefits under qualified long term care policies cannot copy benefits from Medicare
Premiums for qualified long term care insurance ( the definition is discussed below) are treated as tax deductible if they exceed the 7.5 percent of the insured’s adjusted gross income (AGI). These premiums are not only deductible for the insured; the deduction applies to his or her spouse and other dependents. Meanwhile, the tax deductions for the self-employed and business owners are treated differently.
Self-Employed, partnership, LLCs, S Corporation
Self-employed individuals may deduct a percentage on their premiums as business expense. The percentage follows the age-based limits used in individuals. However, the limit on Adjusted Gross Income does not apply and you can deduct 100 percent of the eligible amount.
C-corporations can deduct 100 percent of all tax-qualified LTC insurance premiums as business expense for all employees, their spouses and dependents. The employer’s contributions for the premiums are not included in the employee’s contribution.