HIPAA

The Health Insurance Portability & Accountability Act (HIPAA) of 1996 (also known as the Kennedy-Kassebaum Bill), successfully addressed three items that affect long-term care insurance. These included the following:

1) Tightening up Medicaid eligibility requirements

2) Setting state standards on long-term care insurance

3) Offering tax incentives for those persons who purchased long-term care insurance

HIPAA designated two types of long-term care insurance policies: tax-qualified (TQ) and non-tax qualified policies (NTQ). The tax-qualified policies are the ones that adhere to HIPAA criteria that standardized long-term care policies and offer tax incentives. Long-term care insurance policies that were purchased before January 1, 1997 (when HIPAA was implemented) were grand fathered in and are considered tax-qualified (TQ) for federal purposes. They will remain tax-qualified if there are no material changes made to them.

As noted in the other sections, the tax deductions that are listed in this section only apply to Tax-Qualified policies.

Individual

Premium payments to purchase qualified long-term care insurance by an individual - for yourself, your spouse, and your tax dependents (e.g. your children or dependent parents) are now included as a personal medical expenses if you itemize your taxes [IRC Sec. 213(a)]. Medical expenses in excess of 7 ½% of your adjusted gross income are tax deductible. This means that a portion of your long-term care insurance premium will help you reach the 7 ½% and may even help you to exceed that threshold to receive a tax deduction. Below is a table of the amount of premiums qualifying as medical expenses for the 2009 and 2010 tax years. This is often referred to as the eligible long-term care premium. These increase each year based on the Medical Consumer Price Index.

Self-Employed

Qualified long-term care insurance premiums may also be treated like health insurance for the self-employed tax deduction. Self-employed individuals may deduct 100% of the eligible long-term care premium shown above [IRC Sec. 162(1)]. The definition of self-employed includes sole proprietorships, partnerships, "greater than 2% shareholders" of S-corporations, or Limited Liability Corporations.

Example: Bob, age 61, owns his own consulting firm. His long-term care insurance premium is $1,750 per year. Based on the chart listed under the INDIVIDUAL section, he is eligible to deduct 100% of up to $3,290. Therefore, he can deduct the entire $1,750.

C-Corporations

Premium payments are fully (100%) deductible as a reasonable and necessary business expense- similar to traditional health and accident insurance premiums [IRC Sec. 213(d)1]. This can apply to the owners, their spouses and dependents, and all employees.

Employer-paid long-term care insurance is excludable from the employee's gross income [IRC Sec. 106(2)] and the benefits received are tax-free.

Partnerships, S-Corporations and Limited Liability Corporations (LLC)

Premium payments purchased for a partner or owner (2%+ shareholder) are subject to the same rules mentioned above for self-employed [IRC Sec. 162(1)].

Premium payments for non-partner/non-owner or less than 2% shareholder-employee are 100% deductible as a reasonable and necessary business expense -- similar to traditional health and accident insurance premiums [IRC Sec. 162(2)].

Employer-paid long-term care insurance is excludable from the employee's gross income and the benefits received are tax-free [IRC Sec. 106(2)].