How Long-Term Care Benefits Can Affect Taxes
Long-term care insurance policies offer a host of benefits that are exempt from federal taxes and most state income taxes. Premiums paid on policies are treated as health insurance premiums and therefore qualify for federal income tax deductions. However, there are limits based on age.
Federal tax deductible limits are based on total annual premiums paid and the age of the policyholder. For people age 40 and younger, the maximum annual deduction on long-term care insurance is $ 360 for 2013. People ages 41 to 50 have a maximum annual deduction of $ 680, while people age 51 at age 60 they have a maximum deduction of $ 1,360. The deduction for people ages 61 to 70 is $ 3,640, while those over 70 have a current maximum deduction of $ 4,550.
Tax-exempt status on premiums paid for long-term care policies is different from those paid for life insurance plans. Life insurance premiums are often only tax-exempt when the benefits paid for them qualify for income tax. If a life insurance plan qualifies for tax-exempt status by paying premiums, the benefits are generally taxed by the federal government and some state governments as income.
To qualify for federal income tax exemptions and most state income tax exemptions, a long-term care insurance policy must be guaranteed to be renewable and not increase in cash value over time. . These policies are written by life insurance companies. The federal government does not currently tax benefits paying no more than $ 320 per day. Amounts over $ 320 can be taxed as income, but the amount is adjusted each year to account for inflation.
Generally, daily benefits that exceed the current federal limit of $ 320 but do not exceed the daily cost of long-term care will not be taxed due to the fact that they are spent on care rather than additional income. Life insurers report total insurance benefits to the federal government, which issue 1099 tax forms to policyholders. Policyholders must claim the taxable amounts on a federal Form 8853.
The benefits can quickly run out when you look at the average cost of care. A semi-private nursing home charged an average rate of more than $ 220 per day in 2012, which works out to more than $ 80,000 per year and could easily exceed even the best earning year for most people during their working careers. An assisted living facility is more affordable at about $ 44,000 per year in costs, while other services cost more. Home health care costs were around $ 21 per hour in 2012, making home care the most affordable of the long-term care services.