2014 Federal Tax Incentives

Individuals

Tax-qualified (TQ) LTCI premiums are considered a medical expense. For an individual who itemizes income tax deductions, medical expenses are deductible to the extent that they exceed 7.5% of the individual’s Adjusted Gross Income (AGI). The amount of the LTCI premium treated as a medical expense is limited to the eligible long-term care insurance premiums, as defined by the Internal Revenue Code 213(d), based on the age of the insured individual. That portion of the LTCI premium that exceeds the eligible long-term care insurance premiums is not includable as a medical expense.


  • Age 40 or Younger can deduct:
  • Age 41-50 can deduct:
  • Age 51-60 can deduct:
  • Age 61-70 can deduct:
  • Age 71 or Older can deduct:

The 2015 per diem limitation under section 7702B(d)(4), regarding periodic payments received under a qualified long-term care insurance contract is $XXX. This means that any benefits paid from an indemnity policy that are over $XXX will be considered taxable income if there are no long-term care costs incurred over $XXX

SELF EMPLOYED

A self-employed individual can deduct 100% of his or her out-of-pocket long- term care insurance premiums, up to the age-based Eligible Premium amounts mentioned above.

Generally, benefits received from a tax-qualified LTCI policy that was purchased by an individual are non-taxable and therefore excluded from Adjusted Gross Income.

Partnerships, Limited Liability Company (LLC), and Subchapter S Corporations

The partner, member or shareholder/employee includes the LTCi premium in his/her Adjusted Gross Income, but may deduct up to 100% of the age-based Eligible Premium, as listed in the tax guidelines for individuals. It is not necessary to meet a 7.5% AGI threshold.

If the sole shareholder/employee purchases LTCi in his/her own name instead of that of the S Corporation, the S Corporation is not treated as a partnership and the shareholder is not treated as a partner. As such, the shareholder is not treated as self-employed and is only eligible to include his/her eligible LTCi premiums in his/her itemized deductions, which are subject to the 7.5% AGI threshold.

Generally, benefits received from a tax-qualified LTCI policy that was purchased by an individual are non-taxable and therefore excluded from Adjusted Gross Income.

C Corporation

Employer
When a business purchases a tax-qualified LTCI policy on behalf of any of its employees, or its spouses and dependents, the corporation is entitled to take a 100% deduction as a business expense on the total premiums paid. The deduction is not limited to the age-based Eligible Premium amounts mentioned earlier. The purchase of a tax-qualified LTCI policy is not subject to any nondiscrimination rules, thus allowing an employer to be selective in the classification of employees it elects to cover (e.g., a select group of officers).

Employee
The entire LTCI premium amount paid by the business is excluded from the employee’s Adjusted Gross Income, even if the premium exceeds the Eligible Premium. This exclusion applies to shareholders/employees in a Subchapter C Corporation and to shareholders/employees who own 2% or less of the corporation in a Subchapter S Corporation.

Generally, premiums paid by the employer and benefits received under an employer-purchased tax-qualified LTCi policy are non-taxable and therefore excluded from the employee's Adjusted Gross Income [IRC 7702B, 104(a)(3)].

Employer-Pay Contributory Arrangements

If an employer pays all or a portion of the tax-qualified LTCi premiums on behalf of an employee, the amount paid is deductible by the employer as a business expense. The deduction is not limited by the age-based limits. The entire employer contribution would also be excluded from the employee's AGI.

If the employer only pays a portion of the premium, the employee is able to apply the balance that he/she pays towards his/her medical expenses, up to the Eligible Premium amount, and would then be entitles to a deduction for medical expenses that exceed 7.5% of AGI.

Generally, premiums paid by the employer and benefits received under an employer-purchased tax-qualified LTCI policy are non-taxable and therefore excluded from the employee’s Adjusted Gross Income [IRC 7702B, 104(a)(3)].

Gift Tax Exclusions

In addition to the annual Gift Tax Exclusion of $14,000 per donee, a donor has the ability to pay for the medical expenses of the donee. If those medical expenses are tax-qualified LTCI premiums, the exclusion is subject to the age-based limits for Eligible Premium amounts listed in Table 1.

An individual (donor) can purchase LTCI policies for family members (donees) and still maintain the annual Gift Tax Exclusion and choose either a Ten-Pay or Accelerated Payment Option. If the donor pays more than the eligible premium that applies to the donee, that amount will impact the annual $14,000 Gift Tax Exclusion. If the donor pays less than the eligible premium, it will not impact the $14,000 Gift Tax Exclusion.