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.

Introduction to Life Insurance
Related Articles
  1. Career Education & Resources

    The Top RIA Deals of 2015

    It was a big year for change within the RIA industry. Here are 2015's biggest mergers, acquisitions and buyouts.
  2. Options & Futures

    Five Advantages of Futures Over Options

    Futures have a number of advantages over options such as fixed upfront trading costs, lack of time decay and liquidity.
  3. Products and Investments

    How to Create a New Financial Product in 10 Steps

    The 10 steps outlined here are essential to the creation of a new financial product.
  4. Professionals

    A Day In The Life Of A Public Accountant

    Here's an inside look at the workdays of two experienced CPAs, to give you an idea of what it might be like to pursue a career as a public accountant.
  5. Professionals

    A Day in the Life of a Public Accountant

    There’s no typical day in the life of a public accountant, but one accountant’s experience may shed some light on what the career entails.
  6. Saving and Spending

    A Key Tip for Making Your Nest Egg Last Longer

    Retirees who don't want to deplete their nest eggs during a bear market should make sure to do the following.
  7. Mutual Funds & ETFs

    Fidelity Target Risk Funds Overview

    Get a brief overview of Fidelity's seven target risk funds, with a description of each fund's asset allocation and expense ratio.
  8. Investing News

    Is it the Right Time to Raise Interest Rates?

    Warning signs have started to emerge that point to a potentially dismal 2016 for the U.S. economy.
  9. Markets

    Four Big Risks of Algorithmic High-Frequency Trading

    Algorithmic HFT has a number of risks, and it also can amplify systemic risk because of its propensity to intensify market volatility.
  10. Mutual Funds & ETFs

    The Top 3 Invesco Funds for Retirement Diversification in 2016

    Explore analyses of the top three Invesco mutual funds for retirement diversification in 2016, and learn about the characteristics of these target-date funds.
RELATED TERMS
  1. Sortino Ratio

    A modification of the Sharpe ratio that differentiates harmful ...
  2. Equity Risk Premium

    The excess return that investing in the stock market provides ...
  3. Net Line

    The amount of risk that an insurance company retains after subtracting ...
  4. Political Risk Insurance

    Coverage that provides financial protection to investors, financial ...
  5. Maximum Drawdown (MDD)

    The maximum loss from a peak to a trough of a portfolio, before ...
  6. Gross Exposure

    The absolute level of a fund's investments.
RELATED FAQS
  1. What's the difference between a stop and a limit order?

    Different types of orders allow you to be more specific about how you'd like your broker to fulfill your trades. When you ... Read Full Answer >>
  2. Are secured personal loans better than unsecured loans?

    Secured loans are better for the borrower than unsecured loans because the loan terms are more agreeable. Often, the interest ... Read Full Answer >>
  3. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  4. Why are mutual funds subject to market risk?

    Like all securities, mutual funds are subject to market, or systematic, risk. This is because there is no way to predict ... Read Full Answer >>
  5. Why have mutual funds become so popular?

    Mutual funds have become an incredibly popular option for a wide variety of investors. This is primarily due to the automatic ... Read Full Answer >>
  6. Can your car insurance company check your driving record?

    While your auto insurance company cannot pull your full motor vehicle report, or MVR, it does pull a record summary that ... Read Full Answer >>
Hot Definitions
  1. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  2. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  3. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  4. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  5. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
Trading Center