HIPAA Tax Incentives
"Qualified" long term care insurance plans meet standards set by the Health Insurance Portability and Accountability Act
(HIPAA) of 1996 (Kennedy/Kassebaum).
- Benefits received from a qualified plan up to the cost of care or $200 per day, whichever is greater, are not taxable.
- Congress has implemented tax deductions for long term care insurance premiums paid by both individual taxpayers and small business owners.
Individual taxpayers. As a result of
HIPAA, the premiums paid for a qualified long term care insurance plan are treated the same as medical expenses for tax purposes.
A percentage of the premium can be deducted once medical expenses exceed 7.5 percent of adjusted gross income. The amount of the premium deduction ranges from $230 for people 40 years old to $2,860 for people 70 and over. These amounts will be adjusted yearly to reflect increases in medical inflation.
Allowable Premium Amount Deductions for Long Term Care
Insurance
Revenue Procedure 2001-59 announces the following maximum itemized medical and dental tax deduction for tax-qualified LTCI premiums for tax years beginning in 2002.
|
Age
|
2002 |
|
Individual |
Couples (both the same age) |
|
40 or less |
$240 |
$480 |
|
41-50 |
450 |
900 |
|
51-60 |
900 |
1,800 |
|
61-70 |
2,390 |
4,780 |
|
71 or more |
2,990 |
5,980 |
All LTCI benefits paid from tax-qualified LTCI reimbursement policies are, of course, non-taxable. For tax-qualified LTCI contracts which pay a fixed daily benefit independent of actual expenses incurred (indemnity- or disability-based LTCI policies) the tax-free benefit has increased to $210 a day.
Small business owners. The 1998 Omnibus Appropriations Conference Agreement signed by President Clinton accelerates the phase-in of a 100%deduction for small business owners and increases the percentage of premiums that may be deducted.
A person who is self-employed as defined by Section 162(1) of the Internal Revenue Code may apply the following percentages to any premium he or she pays on long term care insurance for: self, spouse, dependents and employees.
|
Taxable year |
Percent of premium that is deductible |
|
2002 |
70% |
|
2003 & after |
100% |
Be sure to consult with a qualified tax advisor to determine what is tax deductible in your personal situation.
HIPAA: Consumer
Protection
When Congress passed HIPAA
in1996, they used two important provisions to encourage tax payers to take responsibility for their own long term care needs:
- Consumer protections
- Tax incentives
To be considered "qualified" for tax breaks, a plan must meet federal guidelines set up to protect consumers. The following are just a few of the safeguards required of a qualified plan:
- Guaranteed renewable
- Does not duplicate Medicare
- Must have unintentional lapse protection
- Must offer inflation protection
- Required 30-day free look
When shopping for long term care insurance, be sure to inquire if a plan is "qualified," not only because of the tax benefits but also for the protections for consumers legislated by Congress.
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