Are long-term care insurance premiums tax-deductible?

When preparing for retirement, you may want to think about more than just saving enough money to live comfortably. In most cases, it also makes sense to consider the types of insurance coverage you may need. Otherwise, you could end up depleting your savings to cover unexpected expenses that can arise in your senior years.

For example, it could make sense to purchase Medicare supplemental insurance, or Medigap, to fill in the gaps left by Original Medicare. And it may also make sense to consider long-term care insurance. This type of insurance helps to protect yourself and your family from the potentially exorbitant costs associated with extended healthcare needs in the later stages of life, which are not typically covered by regular health insurance or Medicare. 

However, long-term care insurance is an added expense to factor into your budget, so it can be helpful to understand whether the premiums you pay are tax-deductible — and under what circumstances.

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Are long-term care insurance premiums tax-deductible?

The good news is that long-term care insurance premiums are tax-deductible in many cases. However, the tax deductibility of long-term care insurance premiums depends on several factors, including your age, total medical expenses and the policy itself. 

The age-related limits

According to the Internal Revenue Service (IRS), the current age-related deduction limits are as follows:

• Under 40: If you're under 40 years old, the IRS generally considers your long-term care insurance premiums as a qualified medical expense, and you may be eligible to deduct a portion of these premiums as an itemized deduction. However, the deduction amount is subject to a cap, which is adjusted annually. The deduction cap on long-term care insurance for people under 40 is currently $450.
• Age 41 to 50: If you are between the ages of 41 and 50, the IRS allows you to deduct a slightly higher amount of long-term care insurance premiums as a qualified medical expense. The maximum deduction for this age group is currently $850.
• Age 51 to 60: Those aged 51 to 60 can currently deduct up to $1,690 in long-term care insurance premiums as qualified medical expenses.
• Age 61 to 70: Individuals between the ages of 61 and 70 are eligible to deduct up to $4,520 in premiums.
• Over 70: If you are 71 or older, you can deduct a maximum of $5,640 in long-term care insurance premiums as qualified medical expenses.

It's important to note, though, that these deduction limits are subject to change each tax year, so you may need to check the IRS guidelines for the most up-to-date information.

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The deduction threshold

In order to benefit from the tax deduction on your long-term care insurance premiums, you'll need to itemize your deductions on your federal income tax return. Additionally, your total qualified medical expenses, including the premiums, must exceed 7.5% of your adjusted gross income (AGI) to be eligible for the deduction. If your expenses fall below this threshold, you won't be able to deduct them, according to the IRS. 

For example, let's say you're 60 years old with an AGI of $60,000 and long-term care insurance premiums that are $2,000 per year. In this case, the deduction threshold (7.5% of AGI) would be $4,500. Since your premiums are $2,000 per year, you wouldn't be eligible for a tax deduction for your long-term care insurance for that tax year.

Now let's say that you had higher medical expenses that year in addition to the $2,000 long-term care insurance premium (such as out-of-pocket medical costs). And, these expenses pushed your total qualified medical expenses above the 7.5% threshold of their AGI. In this case, you might be eligible for a deduction on the portion of your premiums that exceeds that threshold.

State tax considerations

In addition to federal tax rules, it's essential to check your state's tax regulations regarding long-term care insurance premiums. Some states may offer their own deductions or tax credits for these premiums, while others may follow federal guidelines.

The bottom line

Long-term care insurance can be a valuable financial asset in planning for your future healthcare needs. And, while the premiums are not always fully tax-deductible, you may be eligible to deduct a portion of the premiums as qualified medical expenses if you meet certain criteria, primarily based on your age and total medical expenses. That can help to make the cost of long-term care insurance more affordable as you ensure that you're covered for these types of expenses.