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Tax Clarification - Long Term Care Insurance

Q. What is tax clarification for private long-term care insurance, and why is it necessary?

A. The tax clarification provisions for long-term care insurance are contained in the Health Insurance Portability and Accountability Act of 1996. The clarifications assure that the tax treatment for private long-term care insurance is the same as for major medical coverage.

Q. Will benefits received by consumers under a long-term care policy be taxed?

A. With the clarifications, benefits from private long-term care coverage, generally, are not taxable. Without the clarifications, benefits from long-term care insurance might be considered taxable income.

Q. Will consumers be able to take a tax deduction for the cost of long-term care insurance? Can consumers deduct from their taxes costs associated with receiving long-term care?

A. The answer to both questions is “yes.” Since private long-term care insurance will now receive the same tax treatment as accident and health insurance, premiums for long-term care insurance, as well as consumers’ out-of-pocket expenses for long-term care, can be applied toward meeting the 7.5 percent floor for medical expense deductions contained in the federal tax code. However, there are limits, based upon one’s age, for the total amount of premiums paid for long-term care insurance that can be applied toward the 7.5 percent floor. (Check with your accountant to see if you are eligible to take this deduction.)

Q. Will employers be able to deduct anything for the cost of providing or paying for private long-term care insurance for their employees?

A. Generally, employers will be able to deduct, as a business expense, both the cost of setting up a long-term care insurance plan for their employees, and the contributions that they may make toward paying for the cost of premiums.

Q. Will employer contributions be excluded from the taxable income of employees?

A. Yes.

Q. Can Individual Retirement Accounts (IRAs) and 401k funds be used to purchase private long-term care insurance?

A. No. However, under a demonstration project, tax-free funds deposited in Medical Savings Accounts can be used to pay long-term care insurance premiums.


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