Tax Changes for LTC

NEW TAX CHANGES AFFECTING LONG TERM CARE INSURANCE PREMIUMS AND BENEFITS

Congress passed a new law in 1996 called the Health Insurance Probability and Accountability Act. Starting in the 1997 tax year, this law may let you deduct all or part of the premium for a long-term care (LTC) insurance policy. Your LTC premium can be added to your other deductible medical expenses. To claim a tax deduction, all of your medical expenses must be more than 7.5% of your adjusted gross income.

Not all long-term care contracts are tax qualified. Policies must meet certain federal standards before you can deduct the premium. These policies are called tax qualified or qualified long-term care insurance contracts. Benefits you receive from a qualified LTC policy are generally not taxable as income.
Benefits received from a policy that is not a qualified LTC policy may be taxable as income.

The Health Insurance Portability and Accountability Act makes changes to the Internal Revenue Code. The Department of Treasury is responsible for developing regulations giving direction as to how the law should be applied. These regulations have not yet been completed. It is important to understand that uncertainty exists. Companies will use their own interpretation of some policy provisions (such as when benefits are triggered) until the Department of the Treasury issues regulations.

How will I know if the premium for my long-term care insurance policy qualifies for a tax deduction?

	LTC policies issued before January 1, 1997 are automatically qualified.
	LTC policies issued on or after January 1, 1997 must be qualified (meet federal standards) before you can deduct the premium. These standards are disclosed below.

The maximum amount you can add to your other deductible medical expenses is based on your age at the end of each tax year.

Age	Limit on deduction
40 years old or less	$200
41 to 50 years old	$375
51 to 60 years old	$750
61 to 70 years old	$2000
71 years old or older	$2500

See your personal tax advisor for information on how these changes could affect you.

When does a qualified policy pay benefits?

Policies issued after January 1, 1997 must use new eligibility standards. You must be certified by a licensed health care professional to be "chronically ill" and have a plan of care. You must be recertified annually that you are still chronically ill if you meet one of the following two standards:

You are expected to be unable, without substantial help from another person, to do at least two of five (or six) Activities of Daily Living (ADLs) for at least 90 days. ADLs are bathing, dressing, toileting, transferring, eating and continence. A state may decide to allow companies to choose which five ADLs to include, or can require companies to use all six. Check with your state insurance department to find out what your state requires.

You must need substantial supervision to protect your health and safety because you have a cognitive impairment.

Policies issued before January 1, 1997 are not affected by these new requirements.