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LTC Tax Incentives

There are two types of long-term care insurance: tax-qualified and non-tax qualified. Both are sold today, but tax-qualified LTC insurance is now commanding a major share of the LTC market.  This shift came about with the passage of the Health Insurance Portability and Accountability Act of 1996.

Some LTC Provisions of the Health Insurance Portability and Accountability Act of 1996 (HIPAA)

(PLEASE NOTE: This information is provided for informational purposes only and should not be construed as tax advice. Please consult your own tax advisor for advice regarding your particular circumstances.)

On August 21st, 1996, the President signed into law the Health Insurance Portability and Accountability Act of 1996 (HIPAA), which, in part, establishes consumer protection standards for tax qualified long-term care insurance policies, and provides tax clarification to make policies more affordable.  Purchasers of tax qualified LTC coverage will generally receive their benefits tax-free. They may also be able to deduct their premiums, subject to the 7.5 percent of adjusted gross income and a specific dollar limitation.
Of significance for members:

1. The new tax law treats tax qualified LTC insurance on the same basis as medical insurance: benefits are not taxed as income.

2. Premiums may be deducted on the same basis as other medical insurance premiums. The amount of LTC premium that may be deducted will be indexed for inflation and is limited by age. In 2009, the dollar limitation is as follows:

Attained Age Prior
to the Close of the
Taxable Year

Maximum Tax
Deductible Premiums
40 or less
41 through 50
51 through 60
61 through 70
71 and above
$320
$600
$1,190
$3,180
$3,980


3. Employers that offer qualified LTC coverage may deduct premium costs as employee compensation:  employees receive the benefits tax free.

4. All tax-qualified long-term care policies must coordinate with Medicare.

5. LTC policies purchased before 1/1/97 which are state approved are grandfathered and considered qualified plans. Adding or increasing benefits to a pre-1997 issued policy may constitute a material change and affect the "grandfathered" tax qualified status of the policy.
While the tax benefits of this legislation may be helpful to some, the more important impact of it is the clear message it sends to all Americans that the government intends to continue to reduce its role in Medicare and Medicaid and promote personal responsibility through the purchase of private long-term care insurance.
 
Questions and Answers Regarding Tax-Qualified Long-Term Care Insurance

What are the characteristics of a "Tax Qualified" Long-Term Care Insurance Policy?

• The policy provides coverage for qualified long-term care services
• The policy does not duplicate Medicare
• The policy is guaranteed renewable
• The policy has no cash surrender value

The policy requires that a Licensed Health Care Practitioner must certify that the insured is a "Chronically Ill" Individual which means:
(a) He/she has been or will be unable to perform two Activities of Daily Living (i.e., bathing, continence, dressing, eating, toileting, transferring) for a period of at least 90 days, or;
(b) He/she has severe cognitive impairment - which means such impairment requires substantial supervision to protect the covered person from harm to self or others and from threats to health and safety.

What are the special issue requirements for a Tax Qualified LTC policy?

• Every company must offer Inflation Protection to every applicant;
• Every company must give the client the opportunity to purchase a nonforfeiture benefit
• The policy must be delivered to the applicant no later than 30 days after the date of approval
• Misrepresenting a material fact and inaccurate completion of medical histories are prohibited.

These requirements are now federal law.

Does the Act address transferring ones assets to qualify for Medicaid?


The Act imposes criminal penalties in Section 217 on those who make asset transfers for the purpose of qualifying for Medicaid benefits.

State Tax Credit and Deductibility Rules

Many states offer tax incentives to encourage the purchase of LTCi. Below is a general summary of state specific tax information for your reference. This information is current through December 2008 and is subject to change.

Taxpayers may need to meet state specific requirements to qualify for deductions or credits for LTCi. For information regarding the tax liability of a case, consultation with a tax consultant or legal advisor is recommended.

What The Coding Means
* = No Credit Or Deduction. No Broad-Based State Income Tax.
** = Same As Federal Tax Law (see above for details).

AL Deduction for amount of the premium paid for qualifying guaranteed renewable LTCi policy.
AK*
AZ*
AR**
CA Deduction. Max amount deductible based on sliding scale, increased each year to account for inflation. Residents who need LTC services for at least 180 days can qualify for a $500 tax credit as long as their adjusted gross income does not exceed $100,000.
CO Credit for taxpayer & taxpayer's spouse in an amount equal to 25% of total premiums paid during tax year, up to $150 for each policy. Available to taxpayers with federal taxable income <$50,000 or two individuals filing a joint return with taxable income <$50,000 if credit is claimed for one policy, joint filers with income of <$100,000 if credit is claimed for two policies.
CT*
DE**
DC Deduction. Not to exceed $500 per year, per individual for annual premiums paid for LTC.
FL*
GA**
HI Deduction. Same as federal tax law, except subject to 7.5% of HI adjusted gross income, instead of federal adjusted gross income.
ID For taxable years beginning January 1,2004 and after, the full amount of the premium paid by a taxpayer for LTCi which is for the benefit of the taxpayer, a dependent of the taxpayer or an employee of a taxpayer can be deducted from taxable income to the extent the premium is not otherwise deducted by taxpayer.
IL*
IN Deduction up to full cost of premium paid for qualified LTCi for taxpayer and taxpayer's spouse.
IA**
KS For tax years beginning in 2005,a subtraction from federal adjusted gross income for $500 in the tax year 2005, increasing each year by $100 until 2010. After 2010, it is a $1000 subtraction from the federal adjusted gross income for premium costs for qualified LTCi.
KY Deduction from adj. gross income allowed for any amount paid during the tax year for LTC premiums.
LA*
ME Deduction of full premium for individual taxpayers. Applies to premiums paid for LTCi policies that have been certified by the Department of Insurance. Deduction is limited to extent the premiums are not claimed as an itemized deduction on federal tax return. For employers, a credit is allowed against the tax imposed for each taxable year equal to the lowest of the following: (A) $5000; (B) 20% of the costs incurred by the taxpayer in providing LTC policy coverage as part of the benefit package; or (C) $100 for each employee covered by an employer-sponsored LTC policy.
MD Credit. Taxpayer is allowed a one-time credit against the state income tax in an amount equal to 100% of eligible LTCi premium paid. The credit may not exceed $500 for each insured, may not be claimed by more than one taxpayer with respect to the same individual and may not be claimed if the insured was covered by LTCi before July 1 2000. No carryover is allowed. For employers, a credit up to an amount equal to 5% of the costs incurred by the employer during the taxable year for providing LTCi as part of the benefit package. The credit may not exceed $5000 or $100 for each employee covered by LTCi under the benefit package.
MA*
MI*

MN Credit allowed for LTCi premiums equal to the lesser of: (1) 25% of premiums paid to the extent not deducted in determining federal taxable income; or (2) $100.
MS Credit. Equal to 25% of premium costs paid during the taxable year for a qualified policy for self, spouse, parent, parent-in-law, or dependent. The credit cannot exceed $500.
MO Deduction. Taxpayers may deduct 100% of all non-reimbursed amounts paid for qualified LTCi premiums to the extent such amounts are not included in itemized deductions.
MT Deduction for entire amount of qualified LTCi premiums covering taxpayer, taxpayer's parents, grandparents & dependents provided insured is a MT resident. Credit allowed for qualified elder care expenses paid by an individual for care of a qualified family member. Premiums paid for LTCi coverage for qualifying family member are included in qualified elder care expenses. Credit not allowed if premium deduction is taken.
NE**
NV*
NH*

NJ Deduction of LTCi premiums may be taken if they exceed 2% of adjusted gross income and cannot be reimbursed.
NM Deduction for LTCi premiums may be taken if not already itemized on their federal tax return. The following deduction amounts are allowed (married, filing jointly): Adjusted gross income <$30,000,a 25% deduction, $30,000-$70,000,a 15% deduction, and >$70,000, a 10% deduction. Deduction amounts allowed (single or married, filing separately): Adj. gross income <$15,000,a 25% deduction, $15,000-$35,000,a 15% deduction, and >$35,000,a 10% deduction. Deduction amounts allowed (head of household):Adj. gross income <$20,000,a 25% deduction, $20,000-$50,000,a 15% deduction, and >$50,000, a 10% deduction. Same schedule applies for all premiums or LTC services not covered under the federal tax law.
NY Credit for 20% of premium paid for qualifying LTCi premiums. Taxpayer is permitted to carry over to future tax years any credit amount in excess of taxpayer ? s tax liability for the year. Employers are eligible for a credit equal to 20% of the premiums paid during the tax year for the purchase of, or for continuing coverage under, a LTCi policy. The credit is not refundable and the credit may not reduce the tax to less than the minimum tax due.
NC Credit allowed for premiums paid on LTCi for taxpayer, taxpayer ? s spouse or dependent in an amount equal to 15% of the premium costs, up to $350 for each policy on which the credit is claimed as long as adj. gross income meets the following limitations: Married Filing Separately <$50,000; Single <$60,000; Head of Household <$80,000; Married Filing Jointly or Qualifying Widower <$100,000.
ND Credit allowed for premiums paid on LTCi for taxpayer, taxpayer ? s spouse, parent, stepparent or children in an amount equal to 25% of the premium costs, up to $100.
OH Deduction of federally qualified LTCi premiums for taxpayer, taxpayer's spouse and dependents to the extent deduction is not allowed in computing federal adj.gross income.
OK**
OR Credit equal to the lesser of 15% of premiums paid during the tax year or $500 for LTCi coverage for individual, dependent or parents. For employers, a credit of $500 is allowed for each employee covered by an employer-sponsored policy.
PA*
RI**
SC**
SD*
TN*
TX*
UT*
VT**

VA Credit. Taxpayer allowed 15% credit for LTCi premiums paid provided the individual has not claimed a deduction for federal income tax purposes. Any unused credit may be carried over against the income taxes in the next five years or until the full credit is used.
WA*
WV Deduction for LTCi premiums covering taxpayer, taxpayer's spouse, parents and dependents to the extent the amount paid for LTCi is not deducted in determining federal income tax.
WI Deduction allowed for taxpayer & taxpayer's spouse for 100% of the amount paid for a LTCi policy to the extent the same deduction is not taken for federal income tax purposes.
WY*

What The Coding Means
* = No Credit Or Deduction. No Broad-Based State Income Tax.
** = Same As Federal Tax Law (see above for details).

 

 

LTC insurance products underwritten by United of Omaha, an affliliate of Mutual of Omaha.



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