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:
- 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.
- 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.
- 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).
- 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.
- 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.
- 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 Interest withdrawn from an annuity is normally taxable.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!)
- 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 Interest withdrawn from a life insurance policy is normally taxable.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.
- 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.
- 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).
- 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.