Tax Considerations of Long-Term Care Insurance

October 25, 2018

The cost of long-term custodial care – including skilled nursing facilities, unskilled facilities, hospice and adult day care facilities – can be devastating to ordinary families. They can reach up to $100,000 per year and even higher in some areas for a semi-private room in a skilled care facility.  What’s more, these expenses are usually not covered under Medicare. Families must cover them out of savings, pension income, home equity. For this reason, many families choose to protect themselves with long-term care insurance.

Are Premiums Deductible?

Individually owned long-term care insurance premiums are generally deductible under certain conditions. The amount of premium you can deduct from your income taxes depends on your age. For tax year 2018 (as well as for 2017), the deduction limits are as follows:

However – you can only deduct them to the extent that these expenses, combined with other unreimbursed medical bills, add up to more than 7.5% of your adjusted gross income (for 2017 and 2018).

What About for Businesses?

If your business provides long term care insurance for employees, including owner-employees, the general rule is that premiums are deductible to the business as an ordinary, necessary expense for employee compensation.

Furthermore, the premiums paid in group long-term care insurance plans are not generally taxable to the employees, except when the benefit is part of a flexible spending arrangement. In this case, premiums paid are included as part of the employee’s gross income.

For sole proprietors, premiums paid to provide coverage for employees is a deductible business expense. You can also deduct your own premiums on Schedule C, which effectively bypasses the 7.5% threshold that normally applies to non-business owners.

In the case of S corporations, special rules apply to those who own more than 20% of the company. These individuals must include premiums paid on their behalf in their own personal income tax returns. However, they can still take the individual deduction described above, subject to age limits.

C corporations can generally deduct premiums paid to cover employees, as long as the business can show that the coverage is part of the compensation provided to the worker in his or her capacity as an employee. In this regard, the IRS treats long-term care plans as accident and health plans under the Internal Revenue Code.

For partnerships, including LLCs that choose to file taxes as partnerships, the company can deduct long term care premiums that qualify as guaranteed payments. For this to be the case, the benefit must be paid to partners regardless of partner income, dividends/distributions of income or partnership assets, and the like.

How Are Benefits Taxed?

For individually owned plans, benefits are generally tax-free, provided payments in excess of $360 per day in 2018 (and 2017) don’t exceed the actual cost of care. Any amounts over  that per diem rate in excess of the actual cost of care may be taxable.

Similar rules apply for employer-sponsored plans. Amounts paid out over the per diem rate that are in excess of the actual cost of care are taxable to the worker.

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