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10 ways to reduce your taxes with long-term care insurance

There are now 10 tax-friendly ways to pay long-term care insurance premiums.  Depending on your situation, you could save hundreds (possibly thousands) of dollars in income taxes over several years by applying just one of these methods.

Caveat:  I’m not a tax advisor.  Each of these situations has additional requirements and you need to make sure that you discuss your unique situation with your tax preparer.

Here are the 10 ways:

  1. Owners of Health Savings Accounts can use money in the HSA to pay for some, if not all, of their LTCi premium on a pre-tax basis.
  2. Owners of a Medicare Medical Savings Accounts can use money in the MSA to pay for most, if not all, of their LTCi premium on a pre-tax basis.
  3. Retired public safety workers (e.g. firefighters, law enforcement, paramedics, etc…) can make tax-free transfers from their government-sponsored retirement accounts to directly pay their LTCi premiums.  (The transfers need to be done by the account trustee).
  4. The self-employed: Someone who has self-employment income (e.g. home-based business, consulting work, etc…) can usually deduct some, if not all, of their LTCi premium under the “Self Employed Health Insurance Deduction” on the front of form 1040.  The LTCi premium for the spouse of the self-employed person can also be included under this deduction.  The self-employment does not have to be a full-time gig.
  5. Owners of closely held corporations (S-corps and C-corps) can pay for LTCi premiums and write it off as a business expense.  It does not have to be offered to all employees.  This is a great way to use business income to protect personal assets and income.  In some cases, a “refund of premium” rider can be added so that all the premiums are refunded to your heirs/estate.
  6. Owners of non-qualified annuities can have interest earned in their annuity applied toward their long-term care insurance premium.  Interest withdrawn from an annuity is normally taxable.  This can now be done without paying tax on the interest this year.  (Everyone can take advantage of this method!)
  7. Owners of cash value life insurance can have interest earned in the policy applied toward their long-term care insurance premium.  Interest withdrawn from a life insurance policy is normally taxable.  This can now be done without paying tax on the withdrawal this tax year.
  8. Owners of old, no-longer-needed, cash value life insurance policies can do a tax-free transfer of the cash value directly to a single-pay long-term care insurance policy.   The gains in the life insurance policy go directly to the long-term care policy without having to pay tax on the gains in the life insurance policy.
  9. State income tax credits and deductions: 29 states and the District of Columbia, now have state income tax credits or deductions for those who own long term care insurance.  Tax credits are available to residents of Colorado, Louisiana, Maryland, Minnesota, Mississippi, New York, North Carolina, North Dakota, Oregon and Virginia.  These tax credits can be as high as 25% of the annual premium and can significantly reduce your state income tax (dollar-for-dollar).
  10. Lastly, if you itemize your federal income tax return, you can include much, if not all, of your long-term care insurance premium towards your medical expense deduction on Schedule A.
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About Scott A. Olson

Scott A. Olson, is the author of “The Guidebook for Making Long-Term Care Insurance Easier.” He is a licensed insurance agent and has specialized in long-term care insurance since 1995. He is licensed to sell long-term care insurance in over 40 states. Scott was born and raised in New Jersey and attended Rutgers University. Scott was a caregiver for a close relative for two years. That personal experience has made him acutely aware of how to help his clients design and choose a long-term care policy that will benefit them when they need it the most. Scott and his wife Carolyn live in Redlands, California. Scott and Carolyn have four sons.

9 comments on “10 ways to reduce your taxes with long-term care insurance

  1. Thanks to the “LTC Professor”, George Braddock, for helping me with the correct name for “Medicare Medical Savings Accounts.”

    To learn more about “Medicare Medical Savings Accounts”, here’s a link to a Medicare publication that explains how they work:

    http://www.medicare.gov/Publications/Pubs/pdf/11206.pdf

    Scott

    • FYI All,
      The publication and links to Your Medicare Medical Savings Account have been de-linked. Not sure why, but possibly that this type of Part C plan will no longer be offered in 2012. Medicare Inf line, Publications option, personnel had no luck in finding a copy. One of their thoughts was that the Medicare and You 2012 pub is ready to come out next month and that many links could have been cut/deleted
      /suppressed!

  2. Excellent compilation, Scott. The more we learn and hear of the downward spiral of Medicaid as a source for extended care, the greater impact these ten options will have on the decisionmaking process to purchase.

  3. [...] You can significantly decrease the “net cost” of your long-term care policy by using pre-tax dollars to help pay your long-term care insurance premiums.  There are now 10 different ways owners of [...]

  4. Can you 1035 exchange an annuity in one person’s name to fund a joint husband & wife LTC policy?

    Can you exchange only part of the value of an annuity into another thing?

    • You cannot do a 1035 exchange from an annuity that is owned by one person into a long-term care policy that covers a husband and a wife.

      In most cases, you can do a partial 1035 exchange from an annuity into a long-term care policy.

  5. >Owners of non-qualified annuities can have interest earned in their annuity applied toward their long-term care insurance premium.
    >

    This sounds like a great way to save up for an LTC policy. Use a non-qualified variable annuity to defer taxes on the gains, and then they become tax-free when used to pay for a lump-sum premium LTC policy. Right ? As long as the tax code doesn’t change for however long you accumulate.

    If a husband & wife were the beneficiaries of an inherited, accumulating annuity, could they buy a Joint LTC by each contributing half the premium ??

    • As you’ve stated, you can use a non-qualified annuity to pay your LTCi premium on a tax-favored basis. Single-premium is one option, but not the only. You can transfer the interest gained in the annuity to pay the LTCi premium on an annual basis.

      Scott

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