Long Term Care Insurance Tax Issues

If there’s one thing that insurance companies, legislators and experts agrees on, it is that LTC insurance tax laws need a lot of change, and in the present form, a lot of study to understand. With a flood of baby boomer retirements, a broken health care infrastructure and unwieldy tax laws, experts are only now beginning to focus on LTC insurance.

So what are the tax benefits and costs of buying long term care insurance? Do you get deductions for care costs and premium payments, and are re-imbursements considered as taxable income? The taxation framework for LTC depends on your, and the taxman’s, interpretation of long term care. If you have an LTC insurance policy, there are guidelines for what treatment and care falls under the definition of long term care. So a chronically ill patient, who needs regular care, would be covered for the cost. The deductions available for long term care are limited to ‘services’ provided, and not medical expenses.

This would be in order to differentiate LTC deductions from deductions available for normal health plan payments. This also means that you need an LTC policy and a standard health plan to avail of deductions for all care costs, including expenses. After a series of court cases decided in favor of including medical expenses along with LTC, the IRS now allows you to submit itemized expenses to avail of deductions, bringing deductions for both costs and expenses under LTC. But then, what about those who do not want the medical expenses covered under LTC? After all, LTC insurance is much more costly than standard health plans. So LTC insurance is now available in two types – Tax qualified and non-tax qualified. Under tax qualified LTC, you are allowed to submit itemized statements for medical expenses, but with strict definitions of available care. The non-tax qualified policy focuses on the cost of long term care, with relatively loose definitions of LTC offering greater leeway to avail of care under this policy.

So what does this mean? Simply put, if you are in serious need of long term care, or you think you will be, the non-tax qualified policy provides you with a better chance of being able to dump all the costs on the insurance provider. If, however, you are buying LTC insurance as a ‘cover’, in case you end up in need of long term care, you would want to receive optimum tax benefits and reasonable coverage for care costs. Hopefully, new legislation will put an end to this guessing game and create a comprehensive LTC insurance product which offers both wide coverage and tax benefits. But until then, what you need to do is be aware of your needs, in terms of health care, and base your decision in terms of your needs, rather than the tax benefits.