Advanced Underwriting Consultants

Question of the Day – January 30

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: Can a self-employed individual realize any tax advantages by running the premium for a qualified long term care policy through her business?

Answer: Yes.  Qualified long term care contracts are generally treated as health insurance for the purpose of the rules.

Those owning more than 2% of self-employed entities are considered to be self-employed for the purpose of health insurance tax rules.  Traditionally, the amount of health insurance premium that could be excluded from the income of a self-employed person was limited.

Since 2003, self-employed individuals can exclude 100% of most business-paid health insurance premiums from taxable income.  The amount of LTCi premium that can be excluded from income for self-employed taxpayers is limited to the age-based LTCi table amount.

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

The amounts paid for health insurance premiums for the self-employed are also subject to self-employment taxes—unlike the premiums paid for non-owner employees.

How does the calculation of taxable income work for a self-employed individual?

Say that Phil, age 58, is a sole proprietor whose business has potentially taxable earnings in 2012, prior to consideration LTCi premiums, of $100,000.  Phil’s business is paying an annual premium of $1,800 for Phil’s tax-qualified LTCi policy.

According to the age-based LTCi table, the maximum premium Phil can exclude from his business taxable income in 2012 is $1,310.  So the business’s taxable income for federal income tax purposes would be $98,690, and his taxable income for self-employment tax purposes would be $100,000.

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.