Long-Term Care Insurance Is Tax Deductible – But Are You Actually Qualified?
Long-term care and assisted living facilities can be incredibly expensive, but long-term care insurance policies are available to help manage any unexpected medical costs. In addition to offering financial security, long-term care insurance is tax-deductible – but do you qualify to deduct it on your taxes this year?
If you’re planning to purchase long-term care insurance, you need to know how the IRS regulates deductions for it and how changes to your financial and medical situation can impact your tax deductions.
Is Long Term Care Insurance Tax Deductible?
In addition to being able to deduct the cost of some of your long-term care expenses, you may also be able to deduct part of your premiums if you decide to purchase a long-term care insurance policy.
How to Qualify for the Long-Term Care Insurance Tax Deduction
To qualify for the long-term care insurance tax deduction, you need to purchase an insurance policy that exclusively covers long-term care. That means it cannot be a hybrid policy that includes life insurance. Over a quarter of Americans that are turning 65 will need to pay at least $100,000 in long-term care costs, and 15% will have costs that exceed $250,000, which makes qualifying for tax deductions critical.
If you want to take this tax deduction, you’ll have to itemize your deductions when you file your taxes. Your medical expenses will need to exceed 10% of the AGI threshold to get the deduction, however, you may be able to avoid this if you are self-employed.
How to Claim the Long-Term Care Insurance Tax Deduction
When you itemize your deductions on your tax return, you’ll need to claim long-term care insurance as a medical expense. Fortunately, the meet the AGI threshold, you can also claim deductions for your other medical expenses. If you use a tax service, you may want to keep records of your premiums.
The 2020 Tax Deductible Limits for Long-Term Care Insurance
The cost of a long-term care insurance policy is relatively low when you’re young, so the IRS adjusts the premium deductions based on age. For the 2020 tax year, your long-term care insurance premium tax deduction maximum is:
More than 70 years old: $5,430
Between 60 and 69 years old: $4,350
Between 50 and 59 years old: $1,630
Between 40 and 49 years old: $810
Less than 40 years old: $430
While it may not be particularly valuable to millennials, the long-term care insurance tax deduction can be a lucrative deduction for people over the age of 60.
If you are already receiving or paying for long-term care, you can receive a tax deduction for medically necessary expenses for a chronically ill person. To meet the AGI threshold, this can include housing and meals at a long-term care facility if the care is medically necessary.
How Tax Benefits Change Based on Different Situations
While there are no income limits to deducting your long-term care insurance premiums on your tax returns, how you benefit will depend on your individual tax situation.
Standardized deduction: If you choose to take the standardized deduction when you file your taxes, you will not be eligible to deduct your long-term care insurance premiums.
Increase in income: An increase in income will result in a higher AGI threshold, which can ultimately make you ineligible to receive a benefit from the tax deduction.
Changes in health: A decline in your health can lead to greater medical expenses for you to deduct, but a health improvement could reduce how much you are able to deduct.
If your income is on the cusp of the AGI threshold, you’ll want to watch your income and medical expenses carefully. Look for ways to optimize your medical deductions through other insurance policies.
How to Make the Most of Your Tax Deductions
Preparing for your long-term care is part of planning for your retirement. You need to plan for your financial future and know how you’re going to pay for medical care if you lose your independence.
If you take advantage of tax deductions now, you may be able to put your tax savings toward investing in your future. That includes more than just buying a long-term care insurance policy – with the right financial plan, you can have an insurance policy and a retirement account that earns interest.
The best way to optimize your tax deductions is to work with a tax professional and a financial advisor. Financial professionals are experts when it comes to finding tax deductions, plus they know how to build wealth for the future.
With the right financial team, you can put together a comprehensive retirement plan that includes a plan for any other financial goals you may have.
Looking for more information about retirement planning services? Contact Mooney Lyons to see how we can help you plan for the future.