Intro
Uncle Sam offers some tasty tax breaks for buying long-term care insurance (LTCi)—in fact, they can be better than what you’d get with IRAs or 401(k)s.
Every tax break won't work for you, but think of them like a spread at a fancy dinner—there are plenty of options, even if you don’t take a bite of everything. You might not use every deduction, but you’ve got a buffet of options to choose from.
If you haven't seen A Christmas Story since last December, you might enjoy this 1-minute clip.
Remember to use the letters LTC as a guide to achieve these goals: Learn about options, Talk with family, and Create a plan. Understanding your true costs of buying LTCi after your tax savings will help you with your plan.
Post jargon
HIPPA: that privacy law you hear about at your doctor’s office
hybrid: newer LTCi combining life insurance with LTC benefits
LTC: long-term care
LTCi: long-term care insurance
MedicAID: healthcare public assistance
traditional policy: early LTC insurance referred to as "pure" LTCi
➡️ Explore all the LTC jargon
Special tax breaks
Long-term care insurance is the only vehicle, besides HSA accounts, where some or all of your:
- premium (what you pay) can be tax-deductible
- benefits (what you get) are received tax-free
You get a special tax break on your money going both in and out. 🎉
Most other tax-qualified products, like an IRA or Roth IRA, only offer a tax break for money coming in or out, but not both. LTCi tax breaks are special.
Why the tax breaks?
In 2020, MedicAID spent over $200 billion on long-term care, which accounted for 34% of all MedicAID spending.
LTC is a huge cost to the government, and they want someone else to foot the bill.
To get someone else to pay, they've tried several tactics.
- LTC partnership plans
- State programs like Washington Cares
- Tax breaks to buy long-term care insurance
What qualifies?
For LTCi to be considered tax-qualified, it has to meet a bunch of requirements specified by HIPAA, like standardized benefits and criteria. But the type of policy matters.
Traditional LTCi
Since traditional policies are "pure" LTC insurance, the full premium may be tax-deductible.
Hybrid LTCi
Hybrids combine life insurance and LTC insurance, so only the LTC portion of the premium gets tax breaks. Uncle Sam doesn't offer tax deductions on life insurance premiums.
Some hybrids provide separately identifiable life and LTC premiums. These include:
- OneAmerica Asset Care
- Securian SecureCare III
- Nationwide CareMatters II
- Nationwide CareMatters Together
For example, if you spent $100k on this example hybrid policy, 42% of the premium is allocated to LTC and potentially deductible.
To compare a few hybrid policies, fill out the form below.
Who qualifies?
The amount of tax breaks varies based on who purchases the policy.
Individuals (good)
If you’re buying long-term care insurance on your own, you may be able to deduct the premiums as medical expenses. To receive this tax benefit, your total medical expenses must exceed 7.5% of your annual income (AGI), and you must itemize your deductions instead of taking the standard deduction.
Self-employed business owners (better)
If you're self-employed (like an LLC owner), you can deduct LTCi premiums using the Self-Employed Health Insurance Deduction, which lowers your taxable income. It’s subject to IRS caps based on your age, but the good news is you don’t need to meet the 7.5% AGI requirement or itemize your deductions like individuals do.
| Age | 2024 premium limit |
|---|---|
| ≤ 40 | $480/yr |
| 41-50 | $890/yr |
| 51-60 | $1790/yr |
| 61-70 | $4770/yr |
| 71+ | $5960/yr |
Many self-employed individuals spread premium payments over multiple years (e.g., annually over ten years) to maximize their annual deductions up to IRS limits.
C corporations (best)
Your company can cover the full cost of your LTCi premiums and deduct it as a business expense with no age-based limits, as long as it is considered reasonable compensation.
This can be especially helpful for hybrid policies with their higher upfront premiums, but you should make sure these costs meet the necessary requirements for deductibility.
State tax benefits
Many states offer deductions or credits if you buy long-term care insurance. These perks vary, but they usually align with federal tax rules and encourage you to rely on LTCi for future care instead of state-funded programs.
Wrap up
Long-term care insurance comes with several tax breaks, but like any fancy dinner, there are limits to what you can enjoy. The IRS has its usual conditions, so be sure to know what’s on the menu. But with the right strategy, you can savor some serious savings and leave Uncle Sam feeling full and satisfied. 😉
