Here are four ways non-business owners can still benefit from LTC Insurance tax incentives

As a business owner of a C-Corporation, I've greatly benefited by being able to pay the long-term care insurance premiums for myself and my spouse through the business.  

We've been able to deduct 100% of the premium as a business expense.[IRC 162(a)]  Since LTC Insurance is treated like health insurance, the premium paid by the corporation is excluded from my Adjusted Gross Income.  Finally, any benefits we may receive for long-term care will be non-taxable as well [IRC 7702B].  

Any C-Corporation can treat select employees similarly, and standalone LTC Insurance is a popular executive benefit because of this truly unique tax benefit.

However, not all of us have this corporate advantage for LTC coverage. For individuals, LTCI premiums are considered medical expenses and deductible to the extent they exceed 10% of an individuals adjusted gross income (AGI).  They are also limited to the eligible premiums below [IRC 213(d)(10)] based on the age of the insured individual.  

The benefits are received tax-free up to the actual expenses of daily care.  In cases where someone has a cash plan that pays a benefit in excess of actual expenses, the tax-free amount is $340 per day.

Now it get's interesting

 So how can non-business owners still get the great LTC tax advantages?  Here are four ways it can happen:

1. You own a health savings account. If you are one of the 14 million people who controls over 28 billion in HSA dollars, you may be able to pay for LTC pre-tax.  For 2016, individuals can contribute $3,350 into their HSA account pre-tax.  Those 55 or older can add another $1,000 as a catch up provision.  Let's say you have a LTC policy with premium of $2,500 that is due February 1st.  Under the law, you can contribute an amount equal to your premium on January 15th and pay the premium with HSA dollars on February 1st.  You've just paid your premium with pre-tax dollars and lowered your net premium price by quite a bit!
2. You own an annuity. Specifically, you own a non-qualified annuity that has some value.  Under the terms of the 2006 Pension Protection Act (PPA), you can conduct a 1035 exchange for a partial amount of the premium that is paid directly to the LTC Insurer.  Now, instead of receiving an annuity benefit that may have some taxable income, you are purchasing LTC premiums that could result in a tax-free benefit one day.  Genworth published a great white paper describing the technique - download it here.
3. You are a retired police officer receiving a pension.  The PPA allows public safety officers, such as police or fireman, to have their pension plan pay premiums to LTC insurance carriers (up to $3,000 per year) with no taxable consequence.  Here's an example of the process if you are a Wisconsin trooper.  It makes a lot of sense to encourage pension holders to protect their income from long-term care.  Let's hope this idea is expanded to everyone who has a pension or 401(k).
4. You own a policy in a state that offers tax credits .  Some states, such as New York, offer tax credits for LTC policyholders.  It's well known that a tax credit is better than a deduction in that it offsets tax liability dollar for dollar.  In the case of New York, a credit for personal income tax is allowed equal to 20% of the premiums paid during the taxable year for qualified long-term care insurance.  For someone with a $2,500 annual premium, a $500 credit is pretty nice.  It's not surprising that states are granting tax credits for long-term care buyers - LTC is a huge budget issue and more LTC policy owners means less potential stress on state Medicaid budgets.

As you can see, just because someone isn't a business owner doesn't mean there may not be great tax incentives for buying coverage.  And, as clients age, many will have a chance of meeting some of higher individual deductions rules.

Want to learn more?