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How to Use Long Term Care Insurance Tax Credits

There seems to be a lot of confusion among people looking for long term care insurance tax credits. While it may sound confusing, there are some basics that will help clarify your situation. In this arena the IRS provides taxpayers with benefits, not Long Term Care Insurance tax credits. These benefits come in the form of deductions and may lower the amount of taxes you owe. This is good news to anyone remotely considering Long Term Care Insurance (LTCi), or currently paying premiums. Claiming the deductions is not as scary or difficult as it may seem.

 

Tax Credit or Deduction?

Let's look into a little clarification here. There are 2 types of tax credits - refundable and non-refundable. Refundable credits are payments the IRS applies to your taxes due or sends to you as a refund if you do not owe tax. Non-refundable credits are simply applied to the taxes you owe to minimize your tax debt.

Benefits in the form of deductions work a little bit differently. Certain portions or all of your medically related insurance premiums and expenses may be deducted from your income. By reducing your income the deduction reduces your taxes due, which may result in a refund or an increase in your refund.

 

Qualified and Non-qualified

There are two types of LCTi - qualified and non-qualified. Qualified policies meet the requirements set forth by the Health Insurance Portability and Accountability Act (HIPAA). With a qualified LCTi plan you generally don't have to pay taxes on benefits. Most plans qualify, but check with your tax preparer or insurance agency to be sure.

 

About those Deductions

Long Term Care Insurance is considered health insurance. Health insurance premiums are tax deductible - this includes LTCi premiums. However, there are limitations based upon age. View the following table. Note that you must claim the lower of the actual amount paid or the maximum deduction allowed.

 

Age at the end of the year  Maximum premium deduction allowed
40 or younger
 
$280
41 - 50
 
$530
51 - 60
 
$1,060
61 - 70
 
$2,830
71 or older
 
$3,530

This table is based on Pub. 535 2006. Pub. 535 2007 is not yet available.

 

How to Claim

Insurance premium deductions are claimed on Schedule A itemized deductions. This is where you will claim your allowable LTCi premium deduction along with all other qualifying medical expenses. These include but are not limited to: other health insurance premiums, mileage allowance to and from your doctor, your medical lodging and meal expenses when you must travel far for care, insurance deductibles, prescription medicine, and prescribed medical equipment.

To claim any medical deductions they must exceed 7.5% of your adjusted gross income. You may only claim a deduction for the amount over 7.5% of your adjusted gross income. This is where things get a bit tricky and are best explained by example.

Let's say that Kelly kept track of all her medical expenses.

 

She has an adjusted gross income of $57,290.

Her medical expenses total $7,632.

Adjusted gross income 57,290 X .075 = 4297

Total medical expenses 7,632 - 4,297 = 3,335

Kelly can claim a deduction of $3,335 in medical expenses on Schedule A itemized deductions.

 

Self-employed?

For the self-employed there are restrictions, but not percentage limitations. Self-employed individuals will figure their allowable LTCi deduction using a worksheet in Pub. 535 and enter it directly onto form 1040. Other health insurance premiums which qualify will be entered either on Schedule C as business expense or Schedule A itemized deductions. However you calculate your deduction be careful not to enter your LTCi deduction twice.

 

Who is Eligible?

Now that you know how and where to enter your deductions you may ask, "Whose long term care insurance premiums and medical expenses may I claim?" You may claim yours, your spouses, and your dependents' premium payments and medical deductions.

If the technicalities seem too complex hire a tax preparer to complete your taxes or purchase do-it-yourself tax software.

The benefits you gain may be well worth the preparation or product fees. Whichever tax filing option you choose you'll be able to make an informed decision. Even though the IRS doesn't offer Long Term Care insurance tax credits you can take advantage of the deductions.

The Shoppers Guide to Long Term Care Insurance