What is the Long-Term Care Insurance Credit?
Long-term care insurance is insurance that provides coverage for people who require long term health care; thus, nursing home care and assisted-living facility options may be covered by long-term care insurance policies. There are both federal and state based income tax credits, which may be available for those who paid premiums for a qualified long-term care insurance contract.
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What is Long-Term Care Insurance?
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Long0term care insurance is a type of insurance designed to provide coverage for extended health care. Thus, individuals with cognitive issues such as Alzheimer's Disease, the elderly or the disabled may seek to obtain long-term care insurance. Each type of policy offers different levels of coverage, but generally the policy covers extended care at such facilities as nursing homes, assisted living facilities and adult day care centers. Additionally, some policies offer limited coverage with just activities of daily life such as bathing or eating, while other policies cover more extensive care, such as skilled nursing.
Federal Based Credit
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Pursuant to the Internal Revenue Service (IRS) code, you may be qualified to receive an income tax credit for premiums paid on a long-term care insurance policy for yourself, a spouse or a dependent, if you were permitted to claim a personal exemption on your federal tax return for that person. If so, federal law allows for 15 percent of the cost you paid for the premium, so long as you do not exceed $350 for each policy for which you claim the credit.
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How to Calculate Federal Based Credit
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To calculate your federal based credit for long-term care insurance, you must obtain the exact amount paid for the insurance policy. You are not permitted to include premiums that you have deducted from the federal gross income. In addition, you cannot permit premiums that have not been included in your federal gross income. Thus, if your policy premium is a benefit of your employment and is deducted from your wages each pay period, these may not be included in the calculation. In addition, the policy premium cannot be claimed if you have already made a claim for the amount in medical expenses or if you claim the amount based upon self-employment. Finally, the amount used to calculate the deduction is not subject to being carried over into the next year.
State Based Credit
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In addition to a federal based income tax credit for long term care insurance, there are many states which offer a state based credit for the same reason. Colorado, Louisiana, Maryland, Minnesota, New York, North Carolina, North Dakota and Oregon all offer tax credits based upon long term care insurance policy premiums. In addition, other states, including Alabama, California, Hawaii, Kentucky, Ohio, Virginia and Wisconsin, among others, offer a tax deduction for the same reason. The policy for the tax credit or deduction is the idea that those individuals who prepare for their long term health care needs reduce the financial burden on the state in providing the same care through poverty-based programs, such as Medicaid. Every state has different methods for calculating the credit, so it is crucial to assess the particular requirements of the state in which you reside.
Tax Qualified Long Term Care Insurance Plans
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Many long-term care insurance providers offer plans that are referred to as tax-qualified plans. If a plan is a tax-qualified plan, the benefits pursuant to the plan are not taxable. According to IRS regulations, a tax qualified plan exists when a policy requires a medical doctor to establish a medical plan. Furthermore, the IRS requires that the policy indicates that a person requires care for at least 90 days, is unable to do at least two activities of daily life, such as bathing or eating, and requires substantial assistance to do so. In addition, a tax qualified plan exists when the policy requires that the person need substantial assistance for at least 90 days due to a cognitive impairment.
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