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As you begin to look at the cost for care as you age, the figures can be startling. Even a short stay in a nursing home or rehabilitative care facility after an injury or illness can carry a price tag of tens of thousands of dollars. For a longer stay, the bill is even more astronomical.Although some of the costs of nursing care, assisted living or home care are defrayed by savings, Medicare or Medicaid, the majority of people do not have the resources to cover their long-term care. One way that older Americans are preparing for their golden years is by purchasing long-term care insurance.

Long-term care coverage is a type of insurance specifically designed to pay for nursing homes, rehabilitation centers, assisted living and certain types of home care; however, it also provides some significant tax benefits. Although the specific tax rules vary by policy — and the effects on your tax filing and bill will vary according to your individual situation — it’s very likely that you’ll be able to deduct the cost of your long-term care insurance from your taxes.

GENERAL INFORMATION

In general, long-term care insurance plans are treated as a medical expense and deductible under the same rules that apply to those deductions; however, the guidelines are very specific, and not every LTC policy qualifies. Most importantly, your policy must be a qualified long-term care policy that only covers long-term care expenses deemed medically necessary by a licensed health care provider.

Beyond that important stipulation, though, in order for your policy premiums to be tax deductible, your policy must meet additional qualifications. The policy must be guaranteed renewable, and it cannot pay for anything that would be covered by Medicare, unless Medicare is used as secondary insurance. And unlike life insurance policies, which sometimes allow the purchaser to borrow against the value or surrender the policy for cash, tax-deductible long-term care policies cannot have a cash surrender or payout value. Finally, in order to be tax deductible, the policy contract must stipulate that any dividends or refunds from the policy be used toward increasing the value of the policy or paying future premiums, unless the refund is due to cancelling the policy or the death of the beneficiary.

DEDUCTION VALUE

If your long-term care insurance policy qualifies as a tax deduction, the amount you can deduct depends on your age, your income and the cost of your policy combined with any other unreimbursed medical expenses. As with most tax deductions, the long-term care insurance premium deduction requires that taxpayers itemize their deductions.People over age 60 stand to gain the most from deducting their medical expenses and insurance premiums from their taxes; for 2012, those between age 60 and 70 can deduct up to $3,500, while the deductions jump to $4,370 for those over age 70.  In order to take the deduction, your qualified medical expenses and insurance premiums combined must equal at least 7.5 percent of your adjusted gross income.

You cannot deduct the entire value of what you paid for the policy, according to IRS rules, unless you are self-employed and your business netted a profit. To determine the amount of your deduction, subtract 7.5 percent of your adjusted gross income from the total amount of your medical expenses. If the amount is within the limits for your age, you can take the entire amount; if it is greater than the limit, then you can only make the maximum deduction. It’s also important to note that the benefits you receive when you make a claim on your policy are not taxable.


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