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Long-Term Care Insurance - Taxation of Premiums and Benefits

In 1996, the Federal government amended the Internal Revenue Code to allow favorable tax treatment of long term care policies which qualify under the law. Generally, benefits you receive from tax-qualified policies will not be considered as taxable income under either federal or state law. The premiums charged for tax-qualified policies are treated as medical expenses for purposes of itemized deductions up to certain dollar limits that are indexed annually.

Surprisingly, millions of Americans, especially those who own small and mid-sized businesses are unaware that the cost of long-term care insurance protection may be tax deductible." In some cases 100 percent of the cost of coverage can be deducted.

The 2007 deductible premium limits under Section 213(d)(10) for eligible long-term care premiums includable in the term 'medical care' are as follows:

Attained Age before close of Taxable Year & Maximum Limit:

Age 40 or Less Ages 41-50 Ages 51-60 Ages 61-70 Age over 70
$290 $550 $1,110 $2,950 $3,680

Source: IRS Revenue Procedure 2006-53 (2007 limits)

The benefits received under a long-term care policy are excluded from income because they are considered to be received for personal injuries and sickness. For 2006, the tax-free benefit limits were $250 per day or $91,250 a year. However, if the benefit amounts received under a LTC policy exceed the actual incurred costs and go beyond the annual limits they will be taxable to the insured.

Employer payments for group premiums are tax deductible to the employer and not taxable income to the employee.

Practice Question:
Tommy has worked for Bullet Company for 90 days and just qualified for their group benefits plan. Under their group company plan, Bullet Co. pays the premium cost of long-term care insurance for all of their employees. How are the premium payments treated for federal income tax purposes?
A. Employer premiums tax-deductible for employer; Taxable to employee
B. Employer premiums not tax-deductible for employer; Taxable to employee
C. Employer premiums not tax-deductible for employer; Tax-exempt for employee
D. Employer premiums tax-deductible for employer; Tax-exempt for employee

Answer: D
Employer premium payments for group long-term care insurance are tax-deductible for the employer and not included as taxable income to the employee. Long-term care insurance is probably not for everyone, butwith soaring health care costs, insurers increasingly restricting coverage and eligibility, and people's need to stretch retirement savings through more years it's a good idea to consider it seriously. Your goals should be to protect your assets, minimize your dependence on other family members, and control where and how you receive long-term care services.

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