Long term care insurance policies offer a great deal of benefits that are exempted from federal taxation and most state income taxes. Premiums paid on the policies are treated like health insurance premiums, so they qualify for federal income tax deductions. However, there are limits based on age.
The federal government’s tax deductible limits are based on total annual premiums paid and the age of the policyholder. For people age 40 and under, the maximum annual deduction on long term care insurance is $360 for 2013. Those aged 41 through 50 have a maximum annual deduction of $680 while people from age 51 through 60 have a maximum deduction of $1,360. The deduction for people from age 61 through 70 is $3,640 while those over age 70 have a current maximum deduction of $4,550.
The tax-exempt status on premiums paid for long term care policies is different from those paid for life insurance plans. Life insurance premiums often times only are tax exempt when the benefits paid out from them qualify for income taxation. If a life insurance plan qualifies for tax exempt status when paying premiums, the benefits typically are taxed by the federal government and some state governments as income.
To qualify for federal income tax breaks and most state income tax breaks, a long term care insurance policy must be guaranteed renewable and not grow cash value over time. Such policies are underwritten by life insurance companies. The federal government currently does not tax benefits paying no more than $320 per day. Amounts above $320 might be taxed as income, but the amount is adjusted each year to account for inflation.
Generally, daily benefits that exceed the current $320 federal limit but do not exceed the daily cost of extended care will not be taxed due to the fact they are spent on care instead of amounting to additional income. Total insurance benefits are reported to the federal government by life insurers, who issue 1099 tax forms to policyholders. Policyholders then must claim any taxable amounts on a federal Form 8853.
The benefits can be exhausted quickly when looking at the average cost of care. A semi-private nursing home charged an average rate of more than $220 per day in 2012, which is equal to more than $80,000 per year and easily could exceed even the best year of earnings for most people during their working careers. An assisted-living facility is more affordable at about $44,000 per year in costs with other services costing more. Home health care costs ran about $21 per hour in 2012, making in-home care the most affordable of long term care services.