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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.
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