Saturday, October 2, 2004

Insurance: Tax breaks for the long term

By J. Brendan Ryan
Enquirer contributor

When a social problem arises, the federal government sometimes takes the bull by the horns - even if one step at a time.

The need for long-term-care insurance is already burgeoning. And, as medical science, nutrition, and medical treatments improve, the demand will outstrip society's ability to pay for it.

Congress has recognized this problem and has gradually - oh, so gradually, spanning seven years from 1997 to 2003 - approved tax breaks for tax-qualified long-term-care premiums to encourage people to provide for themselves and their loved ones rather than to be intimidated by the specter of the huge expense and be frozen into inaction. Such inaction means that people will rely on the public sector for care. And the public sector, as evidenced by Medicaid's financial problems, cannot handle the burden even now, let alone when the 76 million baby boomers need the care.

In 1997 Congress defined the "qualified" policies and delineated tax treatment for policies that fit that definition. Oddly, it said nothing about tax treatment of "non-qualified" policies, that is, policies that did not meet the definition. So, owners of these latter policies are in a sort of tax limbo and do not know what the tax collectors will say about their policies.

Here is a general rundown of the tax treatment of tax-qualified long-term-care premiums. One should rely on tax counsel for more detailed information.

When individuals pay premiums, they can deduct a portion of the cost as a "medical expense" as defined in tax law. Thus, people who itemize their deductions can deduct premiums and other medical expenses to the extent that all these expenses exceed 7.5 percent of their adjusted gross income.

The portion of the premium that can be deducted in this way increases with age. In 2004 the maximum "eligible premium" that a 40-year-old (or younger) can deduct is $750. Someone age 70 or above can deduct up to $3,250.

Partners in a partnership and members of a limited-liability company that is taxed as a partnership can deduct premiums paid by the employer. Again, the deduction is limited to the "eligible premium" amount explained above.

A self-employed individual can deduct premiums along with any health-insurance premium "above the line." As such, it is deductible when arriving at one's adjusted gross income. So, it is deductible whether one itemizes deductions or takes the standard deduction. Here again, the amount of the premium that is deductible is limited to the "eligible premium."

In a C corporation, the employer can pay premiums for selected employees without concern for nondiscrimination rules. The full premium is deductible, not just the "eligible premium." The covered employee does not have to include the premium payment in taxable income. And these same rules apply to owners of S corporations if they own less than 2 percent of the corporation.

Several other important rules:

• If an employer pays only part of the premium, the employee can pay the balance and deduct it up to the "eligible premium" as a medical expense, subject to the limitations on individual medical expenses outlined above.

• This insurance cannot be purchased through so-called cafeteria plans with before-tax dollars.

• One can pay "eligible premiums" out of a tax-deferred Health Savings Account or Medical Savings Account.

• Premiums paid through a "flexible-spending arrangement" will be included in the employee's gross income.

• Benefits received from such policies are tax-free up to generous limitations.

• Favorable gift-tax rules apply to premiums paid for others.


J. Brendan Ryan is a Cincinnati insurance agent. His column appears every other Saturday. Contact him at 2212 Victory Parkway, Cincinnati 45206; 221-1454; fax 221-3447; or e-mail

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Insurance: Tax breaks for the long term