Cecily Zamora
Long-term care insurance is a crucial consideration for many, with over half of those turning 65 between 2021 and 2025 expected to require it. While it can be costly, there are ways to reduce the financial burden, such as sharing a policy with a spouse or taking advantage of tax deductions. The IRS allows limited tax breaks on long-term care insurance premiums, and these deductions vary by state and are based on factors like age and income. For instance, in 2025, individuals over 70 can deduct up to $6,020, while those under 40 have a limit of $480. Understanding these deductions can help individuals make informed decisions about their long-term care options and alleviate some of the financial concerns associated with aging.
| Characteristics | Values |
|---|---|
| Tax-deductible long-term care insurance | Yes, up to a certain limit |
| Factors determining the limit | Insured person's age and adjusted gross income |
| Limit for individuals over 70 in 2025 | $6,020 |
| Limit for individuals under 40 | $480 |
| Total expenses to qualify for a deduction | 7.5% of adjusted gross income |
| Self-employed deduction | On Page 1 of Form 1040 |
| Tax-qualified LTCi premiums | Cannot be reimbursed under an FSA |
| Deduction limit in Montana | $5,000 per qualifying family member, $10,000 for two or more family members |
| Deduction limit in Missouri | $500 |
| Deduction limit in Wisconsin | 100% of the amount paid for LTCi |
| Deduction limit in Indiana | $500 per year, per individual |
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What You'll Learn
Long-term care insurance premiums may be tax-deductible
Secondly, the total of all qualified long-term care insurance premiums plus eligible medical expenses must exceed 7.5% of your AGI to qualify for a deduction. This is true for both federal and state income tax. For example, in Wisconsin, a deduction is allowed for LTCi premiums covering the taxpayer, their spouse, parents, and dependents, as long as the amount paid for LTCi is not deducted in determining federal income tax.
Thirdly, only long-term care policies that meet the federal government's tax-qualified requirements qualify for a potential tax deduction. These policies come with tax-free benefits and deductible premiums. This means that people who are insured are generally not taxed on the benefits they receive from these policies.
Finally, it is important to note that the rules for deductibility and tax-free benefits can differ by state, so it is always recommended to consult a tax advisor to confirm the rules for your specific state.
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Deduction limits vary by state and age
Long-term care insurance premiums may be tax-deductible up to a certain limit, depending on the insured person's age and adjusted gross income. For instance, for 2025, individuals over 70 can deduct up to $6,020, while those under 40 have a limit of $480. These deductions are only applicable if the insured itemizes their deductions instead of taking the standard deduction. Generally, the total of all qualified long-term care insurance premiums and eligible medical expenses must exceed 7.5% of the adjusted gross income to qualify for a deduction. Self-employed individuals may be eligible to deduct their long-term care insurance premiums on their tax return without itemizing.
The rules for deductibility vary by state. Some states offer tax incentives to encourage the purchase of long-term care insurance, while others have no tax benefits. For example, Montana offers a deduction for the entire amount of qualified LTCi premiums covering the taxpayer, their parents, grandparents, and dependents. On the other hand, states like Florida, Georgia, Illinois, and Wyoming do not currently offer any tax benefits.
Additionally, some LTC insurers offer "shared care" policies, which allow two people to share one pool of benefits. This can be used to maximize tax deductions when there is an age difference between spouses. It is important to note that not all long-term care insurance policies offer tax-deductible benefits, and individuals should consult with their insurer and a tax advisor to understand the specific rules and limitations for their state and situation.
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Tax-qualified LTCi premiums cannot be reimbursed under an FSA
Long-term care insurance (LTCi) premiums may be tax-deductible, but only up to a certain limit. This limit is based on the insured person's age and adjusted gross income (AGI). For example, in 2025, individuals over 70 can deduct up to $6,020, while those under 40 have a limit of $480. In general, the total of all qualified long-term care insurance premiums plus eligible medical expenses must exceed 7.5% of the adjusted gross income to qualify for a deduction.
While long-term care insurance premiums can be deductible, there are specific rules regarding tax-qualified LTCi premiums. Tax-qualified LTCi premiums cannot be reimbursed under a flexible spending arrangement (FSA). An FSA is a type of account that allows individuals to set aside pre-tax money for qualified medical expenses. However, it is important to note that the rules for deductibility and tax-free benefits can differ by state, and taxpayers may need to meet state-specific requirements to qualify for deductions or credits for LTCi. Therefore, it is always recommended to consult with a tax consultant or legal advisor to understand the specific tax implications and eligibility criteria for deductions or credits related to LTCi premiums.
The Internal Revenue Service (IRS) provides guidelines for determining eligible medical expenses, including long-term care services and insurance premiums. Individuals can include qualified long-term care premiums as medical expenses on Schedule A (Form 1040). The limit on premiums varies based on age, with higher limits for older individuals. Additionally, unreimbursed expenses for qualified long-term care services may be deductible as medical expenses.
Some states offer specific tax incentives and deductions for LTCi premiums. For example, Montana offers a deduction for the entire amount of qualified LTCi premiums covering the taxpayer, their parents, grandparents, and dependents. On the other hand, some states, such as Florida, Georgia, and Illinois, do not currently offer any tax benefits for LTCi premiums. It is important to review the specific rules and regulations for each state to understand the tax implications of LTCi premiums.
In conclusion, while long-term care insurance premiums may provide tax benefits, it is important to understand the limitations and eligibility criteria. Tax-qualified LTCi premiums are not reimbursable under an FSA, and individuals should consult with tax professionals to navigate the complex landscape of state-specific regulations and take advantage of any available tax incentives or deductions.
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Self-employed people may be eligible to deduct premiums without itemizing
A lower AGI can reduce the likelihood of being affected by unfavourable phase-out rules that can cut back or eliminate various tax breaks. However, eligibility is determined month-by-month, and the deduction can only be claimed for months when neither the self-employed individual nor their spouse was eligible to participate in an employer-subsidized health plan.
Self-employed people should also be aware that they may not deduct LTCi premiums during any calendar month in which they, or their spouse, are eligible to participate in a subsidized LTCi plan where the employer pays all or part of the premiums.
It is important to note that the rules for deductibility and tax-free benefits can differ by state, so it is always recommended to check with a tax advisor to confirm the rules for your specific location.
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Long-term care insurance is the best alternative to Medicaid
Long-term care insurance is a private insurance option available to anyone who can afford to pay for it. It offers more flexibility and options than Medicaid. While Medicaid is a great benefit for those with low incomes, it may not offer the same choices, benefits, and coverage as long-term care insurance.
Medicaid is a state-run program that offers low-cost or free custodial and medical services to those who qualify based on income and non-financial requirements. It is largely a federal program, but its administration is primarily handled by individual states, resulting in varying degrees and types of long-term care coverage. This means that Medicaid rules, qualifications, and benefits can differ depending on your state.
On the other hand, long-term care insurance policies offer flexibility in coverage options, allowing you to tailor benefits according to your needs. These policies are often tax-qualified, meaning they come with tax-free benefits and deductible premiums. While there are limits on the amount of annual premiums you can deduct, based on age and adjusted gross income, long-term care insurance premiums fall under IRS-approved expenses.
The decision to choose between long-term care insurance and Medicaid depends on individual circumstances. It is recommended to consult with an eldercare attorney, financial advisor, or Medicaid planning professional to determine the best option for your specific needs.
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Frequently asked questions
Yes, long-term care insurance premiums may be deductible on your tax return up to a certain limit, depending on the insured person's age and adjusted gross income (AGI). For 2025, individuals over 70 can deduct up to $6,020, while those under 40 have a deduction limit of $480.
To take advantage of this deduction, you must itemize instead of taking the standard deduction. Generally, the total of all qualified long-term care insurance premiums plus eligible medical expenses must exceed 7.5% of your AGI. Only long-term care policies that meet the federal government's tax-qualified requirements are eligible for a potential tax deduction.
One strategy is to purchase a long-term care insurance policy when you are younger, as premiums tend to be cheaper. Another strategy is to share a policy with your spouse, as joint policies can be cheaper and allow you to pool benefits.
