Advanced Underwriting Consultants

Question of the Day – January 26

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: What are the tax advantages to an individual in purchasing a qualified long term care contract?

Answer: There are two main potential advantages of LTCi for the insured policyowner:

  1. The long term care benefit is income tax free when paid.
  2. The premium paid for LTCi is potentially income tax deductible.

The maximum tax-free benefit payable under a tax-qualified LTC policy in 2012 is the greater of

  • $310 per day, or
  • actual amounts paid for qualified long term care services.

Qualified long term care services are the necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, rehabilitative services, and maintenance and personal care services that are:

1. Required by a chronically ill individual, and

2. Provided pursuant to a plan of care prescribed by a licensed health care practitioner.

Not every taxpayer will be able to deduct the premiums for LTCi.  The premiums are considered to be a medical expense, and are only currently deductible by those taxpayers who itemize.  Further, the medical expense deduction is only available to the extent that total medical expenses exceed 7.5% of the taxpayer’s adjusted gross income (AGI) in 2012.

To make deductibility even more problematic, the amount of premium that is potentially deductible is limited to the lesser of the actual amount paid, or the LTCi age-based table amount, shown on the following chart:

Attained Age Before the Close of the Taxable Year 2012
40 or younger $350
Older than 40 but not more than 50 $660
Older than 50 but not more than 60 $1,310
Older than 60 but not more than 70 $3,500
Older than 70 $4,370

Here’s an example with regard to premium deductibility.  Say that Martha, age 64, is a single taxpayer who has $80,000 of adjusted gross income in 2009.  She is paying $4,200 annually for her LTCi policy.  Martha has $4,500 of other medical expenses, and she itemizes on her tax return.

Martha must first calculate the AGI threshold for her medical expense deduction.  Multiplying $80,000 by 7.5% equals $6,000.  Only those medical expenses in excess of $6,000 are deductible.

Martha is paying $4,200 a year for LTCi, but the chart amount for her age is only $3,500.  She must use the smaller chart number.  Adding her other medical expenses of $4,500 to her chart number of $3,500 yields a sum of $8,000.  That exceeds the AGI threshold by $2,000—which is the amount of her medical expense deduction for 2012.

Thinking of it another way from Martha’s perspective—only $2,000 of her $4,200 LTCi premium is deductible.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.