Tax tipsTax advantages for long-term care insurance

Q: My husband and I are considering purchasing long-term care insurance and have been told that I will be able to get a tax deduction for the (quite expensive) premiums we will have to pay. Our medical expenses are often greater than the 7.5% adjusted gross income limitation providing us with an itemized deduction. Is it true that we can also deduct the long-term care premiums as a medical expense?

A: Long-term care insurance provides certainty that home health care and nursing home services will be available when and if they are needed. As a bonus, the IRS allows some nice tax breaks for qualified long-term care insurance policies.

Benefits are expressed as daily or monthly maximums. The policy may pay equal benefits for both nursing home and home care services. More likely, it will pay only a percentage of the nursing home maximum for home care. The insured may be able to obtain equal benefits by paying a higher premium. Extra premiums can be paid for automatic inflation adjustments to the benefit maximums. The inflation protection feature can be expensive, but probably is worth the investment.

The insured is charged level monthly premiums for the long-term care coverage. Premiums are based on the age when you sign up. As long as you continue paying the premiums, you will remain covered regardless of changes in health or advancing age. The older you are when you acquire the policy, the more expensive the premiums. If you wait too long and develop a serious medical condition, you may nare be able to find coverage at any price.

The premium costs for long-term care insurance is treated as medical expenses for Form 1040 itemized deduction purposes and as a tax-advantaged employee benefit if the employer pays the premiums. Itemized deductions are limited to age-based amounts that are adjusted for inflation annually. These age-based amounts are then combined with your other medical expenses. If the total exceeds 7.5% for 2022 of adjusted gross income, the excess can be written off as an itemized deduction on Schedule A. Self-employed persons can deduct from gross income 100 percent of the qualified amounts paid for health insurance coverage. The 2022 maximum amount of long-term care insurance premiums that can be treated as medical expense is as follows: age at Dec. 31 — 40 or under, $450; age 41 to 50, $850; age 51 to 60, $1,690; age 61 to 70, $4,520; and over 70, $5,640.

A qualified policy can cover only “qualified long-term care services, must be guaranteed renewable, and must not have any cash value. Qualified long-term care services include diagnostic and preventive care, therapy, and rehabilitation. Maintenance and personal care services are also included if the insured meets the tax-law definition of “chronically ill.” To be considered chronically ill, the insured must need help with at least two out of six “activities of daily living.” The six activities are eating, toileting, transferring (for example, moving from bed to chair), bathing, dressing, and continence.

Barry Dolowich is a certified public accountant and owner of a full-service accounting and tax practice with Monterey. He can be reached at 831-372-7200. Please address any questions to Barry at PO Box 710 Monterey, CA 93942 or email: [email protected].